Gap’s Q4 Earnings: Strong Results And Better Outlook

by Trefis Team
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GPS
Gap Inc.
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Quick Take

  • Gap reported revenue growth of 11% in Q4 fiscal 2012 driven by improved marketing and growth in direct-to-consumer business
  • Direct-to-consumer business grew by 28% and will remain one of the key drivers of future growth
  • International expansion is another key growth strategy for Gap
  • China’s apparel market is expected to grow to $200 billion by 2014 and Gap is looking to expand aggressively in this region

Gap Inc. (NYSE:GPS) recently reported its best fourth quarter results since fiscal 2006. The company’s revenues increased by 11% during the quarter due to improved marketing and strong growth in its direct-to-consumer business. [1] In addition, Gap’s brand-focused global management and aggressive international expansion will be key drivers for its future growth. To expand in the U.S., the retailer is looking to increase the footprint of its young sportswear brand, Athleta. The recent acquisition of Intermix (a women’s fashion boutique) will help Gap strengthen its position in the luxury segment as well. [2] Let’s take a look at the key highlights of Gap’s Q4 earnings and what the future holds.

See our complete analysis for Gap Inc.

Improved Marketing Is Helping

About a year back, Gap launched the “Be Bright” campaign for its seasonal collection in collaboration with Ogilvy. [3] 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. So, how are these blogs helping Gap?

According to a 2011 Technorati report, consumer trust on traditional media has declined by 46% since 2006. [4] 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. [5] This has helped the retailer generate more interest among customers and improve its brand image, and the impact was visible in the recently reported results. [6] According to Kantar Media, Gap’s media spending increased by about 13% to $340 million in fiscal 2012. [7]

Online (Direct-To-Consumer) Segment Is Likely To Be A Key Growth Driver

Currently, the apparel industry in the U.S. is being driven by growth in the direct-to-consumer channel. This is evident from the fact that key apparel players such as Abercrombie & Fitch (NYSE:ANF), Urban Outfitters(NASDAQ:URBN) and American Eagle Outfitters (NYSE:AEO) reported substantial growth in their direct-to-consumer business in their recent results. Gap’s own direct-to-consumer revenues increased by 23% in Q3 fiscal 2012, and the growth accelerated to 28% in the fourth quarter. With the growing popularity of online retail sales in the U.S. and Gap’s launch of e-commerce in Japan, we expect this segment to be a significant growth driver in the future.

Aggressive International Expansion Will Assist Growth

Since Gap already has a good presence in the U.S., international markets such as China provide better growth opportunities. With its booming middle class and rising disposable income, China has become the second largest apparel market in the world, with total apparel sales of about $110 billion (2009 figures). Consulting firm Mckinsey expects this figure to cross $200 billion by the end of 2014. [8] It explains why Gap opened 30 stores in China last year and plans to add 35 more in fiscal 2013. Also, the retailer will be shortly opening its affordable luxury brand store Banana Republic in the region. [9] Another Mckinsey report suggests that while Chinese consumers represented only 1% of the global luxury spending in 1995, they accounted for 27% of the spending in 2012. By 2015, China is estimated to have 0ne-third share of the global luxury market. [10]

Apart from this, Gap is looking to add 15-20 Old Navy stores in Japan, which marks the beginning of international expansion for this brand. Japan provides ample opportunities for western apparel retailers. Last year, Gap entered nine new countries with 85 franchise stores and plans to add 75 more in fiscal 2013. [6] This will help the company to create greater brand awareness in new markets.

Our price estimate for Gap Inc. at $40, implying a premium of about 20% to the market price.

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Notes:
  1. Gap’s SEC filings []
  2. Gap To Buy Luxury Retailer Intermix, The Wall Street Journal, Jan 2 2013 []
  3. Gap’s New Campaign: “Be Bright”, Branding Magazine, Feb 16 2012 []
  4. State of the Blogoshpere 2011, Technorati, Nov 4 2011 []
  5. Gap’s Styld.by campaign uses bloggers to build connections, lonely brand, Mar 6 2012 []
  6. Gap’s Q4 fiscal 2012 earnings transcript, Feb 28 2012 [] []
  7. Gap Reports Strong Sales On Increased Marketing spending, AdvertisingAge, Feb 28 2013 []
  8. From Mao to Wao: Winning in China’s Booming Apparel Industry, Mckinsey, Jan 2011 []
  9. Banana Republic Set To Launch In China, South China Morning Post, Aug 15 2012 []
  10. Chinese shoppers ‘biggest spenders on luxury goods’, South China Morning Post, December 13, 2012 []
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