What’s Driving Gap’s $39 Stock Value

by Trefis Team
+28.39%
Upside
39.34
Market
50.51
Trefis
GPS
Gap Inc.
Rate   |   votes   |   Share

Gap Inc. (NYSE:GPS) is a specialty retailer offering clothing, accessories and personal care products for men, women and children. It markets its products under the brand names of Gap, Old Navy, Banana Republic, Piperlime and Athleta. The first three brands are sold through individual stores, internet & franchise businesses, and the latter brands are exclusive to the online channel. Among the drivers to its growth outlook, we believe are Gap’s strong direct-to-consumer channel and its push into Asia. The Chinese market will be beneficial from a long-term perspective given its growth outlook, and the retailer plans to launch e-commerce in Japan, which will further strengthen its geographic presence. These factors position Gap favorably for the future growth.

See our complete analysis for Gap Inc.

Well Positioned Online Channel

Gap sells its three main brands through the company operated stores, and internet & franchise business. However, the online channel offers two more brands ie. Piperlime (offers leading brands in footwear and handbags for men, women and kids) and Athleta (women’s sports apparel and footwear). The larger variety of product assortments in the online channel is likely to attract more customers. Along with the rapid growth of direct-to-consumer business in the apparel industry, the aforementioned factor will drive Gap’s direct business as well. Moreover, the revenue contribution of direct & franchise segment has doubled in the last 5 years. It was around 6% in 2007 and the figure stood at 13% in 2011. To add to that, the operating margins of this segment are significantly higher than the stores’ operating margins. The figures are 30% and 20% respectively.

The internet and franchise segment constitutes near 30% of the company’s value according to our estimates. This is same as the value contribution of GAP stores, which account for 35% of the revenues.

Focus On International Expansion

International expansion is one of the key long-term strategies of Gap. The retailer is particularly focused on emerging economies such as China which is becoming a focal point of the global apparel industry. Gap recently opened its first stores in China. If the retailer is able to expand aggressively in the region, it will be in a good position to generate significant revenues due to the popularity of western brands. Moreover, the competition from other western brands such as Abercrombie & Fitch (NYSE:ANF) is limited. With the recent announcement of e-commerce launch in Japan, Gap will strengthen its position in the global market. The retailer already operates this channel in Europe, North America and China.

International Sourcing Helps The Margins

As the teen apparel industry in the U.S. is highly promotional, retailers are constantly facing pricing pressures. Often this leads to lower gross margins. However, like other retailers, Gap also outsources most of its production to low cost destinations such as China (which accounts for 23% of its total merchandise units), thus lowering the production costs. This helps the retailer to ease the margin pressures to a certain extent and provides it with more resources to allocate to R&D and brand building. However, the labor costs are rising in China and soon the region might not be as lucrative for production as before. Under such circumstances, the apparel retailers might have to search for other low production cost frontiers.

Gap’s brand image and revenues suffered towards the end of last decade as it started losing touch of emerging fashion trends. However, it has recovered after 2011 with increased focus on fashion responsiveness with initiatives such as Gap Global Creative Center. Gap will have to maintain its focus on being adaptive to the emerging fashion trends; otherwise its growth will be unsustainable.

Our price estimate for Gap Inc. at $39, implying a premium of about 10% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!