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Investment Overview for Gap Inc. (NYSE:GPS)
- Old Navy Stores EBITDA Margin: EBITDA margins for Old Navy stores declined from 26.1% in 2010 to 22.1% in 2011 due to a sudden rise in cotton costs owing to floods in major cotton producing areas, and excessive promotional activities in domestic operations. The margins rebounded to 24.5% in 2012 with lower cotton prices and better product mix. This improvement continued in 2013 as margins increased slightly to 25.3% with better expense leverage. Going forward, we expect Old Navy's margins to decline slightly this year due to the highly promotional environment in the U.S.and then increase gradually to reach 25.4% by the end of our forecast period. However, if the apparel industry continues to be promotional and Gap Inc ushers heavy markdowns to drive store traffic, its margins can decline. If the figure comes down to 22.5% by the end of Trefis forecast period, there could be 5% downside to our price estimate.
Conversely, if Old Navy's margins improve at a rapid rate and reach 28.5% by the end of our forecast period driven by better operating leverage and development of omni-channel platform, there could be 5% upside to our Trefis price estimate.
- Gap Store Revenue per Square Foot: Gap store revenue per square feet increased consistently from $410 in 2009 to $491 in 2013 driven by consolidation of under-perfoming stores, online revenue growth and strong customer response to the brand's products. The growth in this figure was particularly slow in 2011 as the company couldn't keep up with emerging fashion trends. Going forward, we expect the figure to continue to rise driven by growth of smaller brands - Athleta, Piperlime, Intermix, GapKids and babyGap, rise in online revenues, development of omni-channel platform and store consolidation. We project the figure to reach $598 by the end our forecast period. However, if the growth remains slow and Gap's revenue per square feet reaches just $525 by the end of our forecast horizon, there can be about 5% downside to our price estimate. On the contrary, if the retailer's aforementioned strategies push the figure to $650 instead, there can be about 5% upside to our price estimate for Gap Inc.
Gap is a global specialty retailer offering clothing, accessories and personal care products for men, women and children. It markets its products under the Gap, Old Navy, Banana Republic, Piperlime, Athleta, GapKids, babyGap and Intermix brands.
Gap operates stores in North America, and several countries in Europe and Asia. It is one of the few U.S. apparel retailers who have a decent international presence. The company also sells its products online through web-based stores for each of its brand. The company has recently changed its reporting structure due to its adoption of omni-channel retailing. It no longer reports separate e-commerce revenues but includes them in individual brands' revenues. In addition to this, Gap has franchise agreements with unaffiliated franchisees to operate Gap, Old Navy and Banana Republic stores in many countries.
The retailer operates three different brands for three main demographics: Old Navy for cost and fashion conscious teenagers, Gap for young adults, and Banana Republic for more affluent and relatively older customers.
Gap stores are more valuable than Old Navy and Banana Republic stores in the U.S. because of the following reasons:
Far greater number of Gap stores present in comparison to Old Navy and Banana Republic
The number of Gap stores operated by the company as of 2013 were 1,389. In comparison, the total number of Old Navy stores and Banana Republic stores were 1,022 and 650 respectively.
'Revenue per Square Foot' for Gap stores is higher than that of Old Navy and lower than that of Banana Republic
Gap stores generate revenue per square foot (including online sales) of $490, which is much higher than the $360 generated for Old Navy stores. It is lower than $550 generated by its semi-luxury Banana Republic stores. As Banana Republic stores are fewer in number, their higher revenue per square foot does not entirely offset the value of the Gap stores.
Average size for Old Navy stores is much greater than that of Gap and Banana Republic
The average size of a typical Old Navy store is 17,217 per square foot. This compares to 9,357 per square foot and 8,152 per square foot for Gap and Banana Republic stores respectively. The Old Navy brand operates in the value priced segment where margins are lower. However, due to the significantly larger size of stores, the brand is able to generate significant value for the company by selling more units. Since the beginning of 2007, the company has been downsizing the square footage of Old Navy stores. The trend was more clearly visible in 2013 and we expect this to continue going ahead.
Development of omni-channel platform
An omni-channel platform enables retailers to engage customers irrespective of the shopping channel they prefer. A while back, Gap Inc launched its ship-from-store service, which allows the fulfillment of online orders through store inventories. This service not only enables the company to offer a greater variety of merchandise over the Internet, but also helps it improve delivery responsiveness and store traffic. In Q3 last year, Gap Inc launched “find in store” and “reserve in store” services to enhance its customer service and integrate the digital and store channel. The “find in store” function informs the customers where to find the nearest stores and the “reserve in store” service allows them to reserve up to five items online to try in stores. Since buying clothes is a personal experience and online shopping provides convenience, this offers customers the best of both channels. Encouraged by the pleasing response, the company recently announced that its “reserve in store” service will be expanded to all Gap Stores in the U.S. by the end of the second quarter of 2014. In addition, it will begin testing a new order in store capability later this year, which gives customers an instant access to expanded merchandise offerings over the Internet.
Online apparel sales in the U.S. are growing at a robust pace due to growing internet usage and proliferation of smartphones and tablets. eMarketer forecasts the online apparel sales to increase from about $44 billion in 2013 to $86 billion in 2018.
Efforts to gain market share in the U.S.
While Gap Inc is consolidating its main brand networks in North America, it is looking at other ways to gain share in $300+ billion U.S. apparel market. Apart from expanding Banana Republic, the retailer is relying on smaller brands for the purpose. In an investor meeting held in April 2013, the company stated that it will focus on Athleta, Piperlime, Intermix, GapKids and babyGap to grow its business in North America. Through Athleta, Gap Inc offers performance driven sports apparel and footwear for women. The retailer is planning to expand the brand’s footprint in the U.S., which is currently limited to just 65 stores (2013).
The company opened about 25 Athleta stores in 2012, added another 30 in 2013, and plans of open 30 in 2014. With Lululemon, Athleta’s main competitor, struggling with bad publicity, we believe that it might be a good time for Athleta to expand. Additionally, Gap Inc is opening physical stores for its formerly exclusive online brand Piperlime (shoes, accessories and handbags) and is expanding its recently acquired Intermix (women’s fashion botique) to online channel. Currently, Piperlime operates just one store in the country and Intermix has 37 stores.
Gap's targeted international expansion
International expansion is one of the key long term strategies of Gap. The company is particularly focused on emerging economies such as China, which has become the second largest apparel market in the world with booming middle class, rising disposable income and growing urbanization. The company opened 30 stores in China last year while entering four cities and it plans to add another 30 in fiscal 2014.
The retailer initiated the international expansion of its Old Navy brand last year as it opened 20 stores in Japan. Gap Inc plans to open another 25 old Navy stores in Japan this year. The company also launched the brand's first store in China and is planning to open five more stores by the year end.
A couple of years back, Gap launched the “Be Bright” campaign for its seasonal collection in collaboration with Ogilvy. Through this campaign, the retailer utilized fashion blogs to market its products and attract customers. Gap introduced a website, Styld.by, in partnership with popular fashion and lifestyle blogs such as Lookbook, FabSugar, etc. These blogs seem to be doing well for the retailer.
According to a 2011 Technorati report, consumer trust on traditional media has declined by 46% since 2006. Around 35% consumers trusted blogs to be credible sources of information and 19% agreed with the idea that they are better written than traditional media sources. Gap’s Styld.by blog partners collectively have about 1 million average unique monthly visitors. This has helped the retailer generate more interest among customers and improve its brand image. As a result, it has been performing well in the U.S. even amid an unfavorable retail environment.
Trefis Forecast Rationale for Old Navy Stores & Internet Revenue/Square Foot
This refers to the average annual revenue per square feet of retail store space for Old Navy stores. Annual revenues include revenues from store sales and e-commerce sales. This is an important metric to measure retail sale success and a factor that drives operating margins.
The revenue per square foot for Old Navy stores increased from $296 in 2009 to $350 in 2012 with pleasing buyer response to value focused products and growth in online revenues. The increase in the figure was slower than its historic average in 2013 mainly due to the edgy retail environment in the U.S. arising from increased taxes, slow job growth, higher healthcare costs and other macro-economic factors.
Going forward, we expect the revenue per square foot to increase steadily and reach $465 by the end of our forecast period driven by growth in online business, omni-channel retailing, store consolidation in the U.S. and expansion in lucrative international markets.
- Store consolidation to improve productivity
- Gap Inc has faced problems with its productivity in the past due to high concentration of its stores in North America and outdated products. To address this issue, the retailer closed several under-performing stores which helped it improve its productivity.
- The retailer reduced Old Navy's domestic store count from 1,067 in 2008 to 1,004 in 2013 and is expected to close a few stores in the future as well.
- For 2014, Gap Inc plans to close 70 stores across Gap and Old Navy North America.
- Development of omni-channel platform
- An omni-channel platform enables retailers to engage customers irrespective of the shopping channel they prefer. This helps a company leverage customers' online shopping interest to enhance its store sales.
- A while back, Gap Inc launched its ship-from-store service, which allows the fulfillment of online orders through store inventories.
- This service not only enables the company to offer a greater variety of merchandise over the Internet, but also helps it improve delivery responsiveness and store traffic.
- Last year, Gap Inc launched “find in store” and “reserve in store” services to enhance its customer service and integrate the digital and store channel.
- The “find in store” function informs the customers where to find the nearest stores and the “reserve in store” service allows them to reserve up to five items online to try in stores.
- Since buying clothes is a personal experience and online shopping provides convenience, this offers customers the best of both channels.
- Encouraged by the pleasing response, the company recently announced that its “reserve in store” service will be expanded to all Gap Stores in the U.S. by the end of the second quarter of 2014.
- In addition, it will begin testing a new order in store capability later this year, which gives customers an instant access to expanded merchandise offerings over the Internet.
- Growing e-commerce sales
- For the past several years, Gap Inc's e-commerce sales have increased rapidly driven by strong response to its merchandise along with growing usage of internet for apparel shopping.
- Last year, the company changed its reporting structure and started reporting e-commerce revenues as a part of its individual brand revenues.
- Going forward, the online apparel industry in the U.S. is likely to sustain its growth momentum, which will help Gap's revenue per square foot.
- eMarketer projects the online apparel sales in the U.S. to increase from about $44 billion in 2013 to $86 billion in 2018.
- Use of fashion blogs to promote products
- About a year back, Gap Inc launched the “Be Bright” campaign for its seasonal collection in collaboration with Ogilvy. Through this campaign, the retailer utilized fashion blogs to market its products and attract customers.
- Gap Inc introduced a website, Styld.by, in partnership with popular fashion and lifestyle blogs such as Lookbook, FabSugar, etc. These blogs seem to be doing well for the retailer.
- According to a 2011 Technorati report, consumer trust on traditional media has declined by 46% since 2006. Around 35% consumers trusted blogs to be credible sources of information and 19% agreed with the idea that they are better written than traditional media sources.
- Gap Inc’s Styld.by blog partners collectively have about 1 million average unique monthly visitors. This has helped the retailer generate more interest among customers and improve its brand image.
- New global brand management structure should help
- Under the new global brand management structure, Gap named individual leads for the divisions such as Banana Republic, Old Navy, Gap stores etc.
- A particular segment’s global stores operations, internet business and franchisee business will be brought together under the single management of that segment.
- The new structure was implemented at the beginning of fiscal 2013 and will help the company in devising robust and pertinent strategies for each individual brand.
- Several other notable steps such as the rehiring of ex-executive Tracy Gardener as creative adviser of Gap were also undertaken to strengthen Gap's creative team.
- Expansion beyond North America
- Old Navy initiated its international expansion in 2012 when it opened its first store in japan.
- By the end of 2013, Old Navy had 18 stores operational in the country that were performing very well.
- The company recently launched the brand's first store in China and it plans to add another five by the end of the year.
- Japan and China are two of the most lucrative markets for value focused brands and Old Navy's expansion in these regions will definitively have some positive impact on its revenue per square foot.
Back to Company Overview
- Competitive market segment
- The company operates in a highly competitive market environment where it faces intense competition from national and local department stores, discount and specialty store chains.
- The brands sales largely depend on the company's ability to maintain favorable recognition for the brand and effectively market its products to consumers in several diverse regions and age groups.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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