With over 2,800 stores, North America accounts for 85% of Gap Inc‘s (NYSE:GPS) overall revenues. Despite this large presence, we believe that the company still has an opportunity to grow and gain share in the region’s $300 billion+ apparel market. Gap Inc is consolidating its mainline stores to improve their productivity, expanding Banana Republic and focusing on its younger and smaller brands. It’s also trying to leverage fashion blogs to further solidify its brand image in the U.S. Apart from this, there is an opportunity for the company to grow its e-commerce business as we expect steep rise in the U.S. online apparel market over the next few years.
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Gap Inc’s share of the U.S. apparel market increased by 20 basis points and reached 3.9% 2012, indicating that the company is headed in the right direction. It believes that given the right approach, the figure can rise to 4.5% in the future. 
Consolidation Of Underperforming Stores
Gap Inc has faced problems with its productivity in the past due to the high concentration of its stores in North America and outdated products. In response, the retailer has been closing down its underperforming stores which has improved its profitability. This strategy even mitigated the impact of lower sales in 2011 resulting from the lack of emerging fashion trends.
The company has adopted a similar strategy for its Old Navy brand as well, which saw its revenue per square feet jump by 15% over the course of last four years due to store consolidation.  By the end of fiscal 2013, Gap Inc plans to shut down another 80 stores, most of which will be Gap North America.  The trend is likely to continue for several quarters and will help the company operate an efficient store network without having to worry about self-cannibalization.
Expansion Of Banana Republic
Contrary to Gap and Old Navy, Gap Inc is steadily expanding its Banana Republic stores in North America. The brand’s store count in the U.S. has gone up from 527 in 2006 to 590 in 2012, and we expect this trend to continue.  Banana Republic’s store size is significantly smaller than that of Gap and Old Navy and it generates more revenue per square foot. The table below shows the comparison based on 2012 figures.
|Brand||Gap||Old Navy||Banana Republic|
|Average store size -sq.ft||10,011||17,612||8,254|
|Revenue Per sq.ft.||$391||$300||$500|
Banana Republic offers fashionable collections of casual and tailored apparel, shoes, accessories and personal care products for men and women at higher prices than those offered by Gap and Old Navy. This adds an affordable luxury brand to Gap Inc’s arsenal. The retailer bought Banana Republic in 1983 and has successfully turned it into an affordable luxury brand with exclusive designs and luxurious fabrics. It also has been credited with making fashion more accessible. Due to slow economic recovery in the U.S., affordable luxury has become a popular merchandise category. This is evident from the success of specialty retailer Ann Taylor (NYSE:ANN), which also sells affordable luxury apparel and accessories.
Growth Of Smaller Brands
Apart from its three main brands, Gap Inc offers its products through other smaller brands such as Athleta, Piperlime, Intermix, GapKids and babyGap. In an investor meeting held in April 2013, the company stated that it will focus on these brands 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 35 stores (2012). It opened about 25 Athleta stores in 2012 and plans to add 30 more in the current fiscal year.  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 portfolio. Moreover, GapKids and babyGap are popular brands in their respective segments, and the company plans to develop them into sizable businesses over long term. 
Power Of Fashion Blogs To Elevate Brand Image
Last year, Gap Inc launched the “Be Bright” campaign for its seasonal collection in collaboration with Ogilvy.  Through this campaign, the retailer leveraged 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.
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, which helped it post good results in 2012.  Although this campaign will result in increased marketing expenses, it will help Gap Inc attract customers and subsequently, grow its sales. According to Kantar Media, Gap’s media spending increased by about 13% to $340 million in fiscal 2012. 
Direct-To-Consumer Offers A Big Growth Opportunity
Gap Inc’s direct-to-consumer revenue growth has averaged over 20% for the past three years, which is impressive given the size of its online business. Not just Gap Inc, but also retailers such as Urban Outfitters (NASDAQ:URBN) and Abercrombie & Fitch (NYSE:ANF) have experienced substantial growth in their online sales. Online retail is gaining tremendous popularity in the U.S. due to growing Internet usage and the proliferation of smartphones and tablets. This presents a huge opportunity for the growth of online apparel retail market. eMarketer forecasts the online apparel sales to increase from about $45 billion in 2012 to $90 billion in 2016. 
To strengthen its online channel, Gap Inc launched an iPad app in 2010 to socialize its customer shopping experience.  The retailer’s mobile-optimized sites enable customers to browse and shop online as well as locate a nearby store.  Recently, Gap Inc launched ship-from-stores service for Old Navy, wherein online orders can be fulfilled with store inventory.  This service is a part of the company’s omni-channel initiative and was already available with Gap and Banana Republic. The retailer fears that it might lose customers if they do not find products, fits and colors according to their likings over the Internet, and assume that even stores will not have these products. . Gap Inc will also be testing a reserve-in-store service, which will allow the customers to reserve their products online and buy them at stores.  As a result, the customers might end up buying more than what they come for. We believe that these strategies will help the retailer to ensure a steady long term growth for its direct business in North America.
Our price estimate for Gap Inc. at $47, implying a premium of about 15% to the market price.Notes:
- The Gap’s CEO Hosts 2013 Investor Meeting, April 17 2013 [↩] [↩] [↩]
- Gap’s SEC filings [↩] [↩]
- Gap’s Q1 fiscal 2013 earnings transcript, Mat 23 2013 [↩]
- Gap’s Q4 fiscal 2012 earnings transcript, Feb 28 2013 [↩]
- Lululemon Admits to Bad ‘Testing Protocols’ in Aftermath of See Through Yoga Pants Debacle, Fashionista, April 4 2013 [↩]
- Gap’s New Campaign: “Be Bright”, Branding Magazine, Feb 16 2012 [↩]
- State of the Blogoshpere 2011, Technorati, Nov 4 2011 [↩]
- Gap’s Styld.by campaign uses bloggers to build connections, lonely brand, Mar 6 2012 [↩]
- Gap’s Q4 fiscal 2012 earnings transcript, Feb 28 2012 [↩]
- Gap Reports Strong Sales On Increased Marketing spending, AdvertisingAge, Feb 28 2013 [↩]
- Retail Ecommerce Set to Keep a Strong Pace Through 2017, eMarketer, Apr 24 2013 [↩]
- Gap makes shopping more social with ipad app, Mobile Commerce Daily, April 12 2010 [↩]
- Gap broadens mcommerce repertoire via mobile-optimized site, Mobile Commerce Daily, May 26 2011 [↩]
- Gap’s Q1 fiscal 2013 earnings transcript, May 23 2013 [↩] [↩] [↩]