Gap (NYSE:GPS) recently reported revenue and comparable store sales growth of 3% and 2% respectively for the month of August.  The figures aren’t bad given the U.S. apparel retail industry is going through a weak back-to-school season. These results follow the retailer’s strong performance in the last quarter amid an edgy retail environment. Gap’s success can be attributed to an encouraging customer response to its new products and relevant marketing campaigns. The company also ushered big markdowns and offered attractive deals in order to drive store traffic, which worked in its favor.
At the start of the season, the Nation Retail Federation had predicted a steep decline in average spending by families during the period of mid-July to mid-September. The prevailing weakness in the U.S. economy and change in shopping trends were the main factors behind this forecast. Moreover, the U.S. consumers are diverting some of their spending towards cars and houses due to low interest rates.  Gap’s growth amid such conditions is admirable.
Why Is This Year’s Back-To-School Season Weak?
At the start of the season, the National Retail Federation (NRF) conducted a survey that suggested a sharp decline in consumer spending during the back-to-school season. According to NRF, spending by families with school-age children will decline by almost 8% during this season compared to the same period last year. Moreover, average spending by college students and their families is also expected to decline by a similar amount. 
The main reason behind this is the sluggish economic environment in the U.S. resulting from payroll tax increase and high unemployment, which is dragging the consumer confidence down. The survey found that eight out of every ten shoppers were planning to lower their spending in one way or the other. Also, about 76% of the college shoppers said that they will spend less this season and 37% said that they will shop only during the discount sales. Interestingly, about 45% shoppers were of the idea that they will use their previous year’s products rather than shopping again. 
Apart from the economic factors, a change in shopping trends is also impacting back-to-school spending. According to the same survey, about 24% of the families had shopped for their children before or at the start of the season. Since the figure was more than what it was in 2012, U.S. shoppers appear to be adopting the new shopping trend where they shop at the beginning of the season to take advantage of initial markdowns and fresh inventory. This is followed by a lull and the customers do not return until the end of the season sales.  Overall, this trend weighs on the sales growth as customers mostly buy products at discounted prices.
Gap Still Managed To Post Positive Growth
Gap was among the few retailers in the U.S. that posted positive comparable store sales growth in the recently concluded quarter. The retailer continued this strength in August as it registered 2% growth in its comparable store sales driven by new and relevant product launches and large number of markdowns.
Gap has been on top of changing fashion trends which has allowed it to attract customers with appealing products. Last year, it did a complete overhaul of its top level management and appointed separate heads for different divisions and brands to specifically focus on their individual needs.  The company’s strong inventory control has also helped it remain responsive to changing fashion trends for different seasons. The retailer operates a flexible supply chain with over 1,000 vendors located in 40 countries with none of them accounting for more than 5% of the goods. Moreover, about 98% of the inventory is sourced from outside the U.S., which helps it offer good products at competitive prices. 
For back-to-school season, Gap launched a number of products for kids such as skinny jeans, uniform ruffle shirt, bootcut pants, capri pants, jumper, neon pleated skirts etc.  The company also launched a global marketing campaign “Back To Blue” during August to further solidify its brand image. The campaign featured celebration of the brand’s heritage through different channels such as print, outdoor, direct, social, in-store, digital and television.  The month of August was marked by heavy discounts as the shoppers remained reluctant in spending on apparel. Gap also offered large discounts and attractive deals such as 52% off on sleepwear, 30% off on kids and baby swim styles, free shipping for $50 + orders etc. This helped the retailer drive store traffic, which resulted in positive comparable store sales growth across all its brands despite the discounted prices.
Our price estimate for Gap Inc. at $50, implies a premium of about 20% to the market price.Notes:
- Gap Inc. Reports August Sales, Gap Inc., Sept 5 2013 [↩]
- U.S. retailer rely on deep discounts to win back-to-school shoppers, Reuters, Sept 5 2013 [↩]
- On The Heels To Historically High Back-To-School Season, 2013 Spending Expectations Decrease, National Retail Federation, Jul 18 2013 [↩] [↩] [↩]
- Gap revenue beats as same-store-sales rise 5%, CNBC, Aug 22 2013 [↩]
- Gap Inc.’s SEC filings [↩]
- Gap Kids [↩]
- Gap Gets “Back To Blue”, Gap Inc., Aug 12 2013 [↩]