While specialty apparel retailer Gap Inc (NYSE:GPS) has enjoyed steady growth in the U.S. for the past few years, it has struggled in European markets. The company’s namesake brand’s revenues in Europe have come down from $703 million in 2010 to $691 million in 2012 despite continued expansion. Also, Gap’s revenue per store has decreased at an average annual rate of more than 3% during this period. On the other hand in the U.S., while the brand’s revenues have declined due to store consolidation, its revenue per store has improved by close to 4% every year, with 2012 being the strongest. 
Gap’s dismal performance in Europe can be attributed to the prevailing economic weakness in its key markets such as France and the U.K. While the economies of Germany and Russia present good opportunities for expansion, Gap Inc cannot ignore its existing markets as they are among the biggest apparel markets in Europe. In this analysis, we take a look at how Gap Inc can ensure its growth in these regions. While unfavorable economic headwinds still impact the U.K.’s apparel market, its large size and positive growth forecast looks favorable for the retailer. In France, growth in e-commerce and a change in shopping trends offer a silver lining for Gap. Overall, the brand operates close to 200 stores spread across the U.K., France, Italy and Ireland.
Our price estimate for Gap Inc. at $50 implies a premium of about 30% to the market price.
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France Can Get Better
Due to the economic slowdown, the apparel market in France has remained stagnant for the past four years. As purchasing power has declined due to high unemployment and low wages, French shoppers have been holding back their spending on apparel. Instead, they are spending on essential needs such as food and healthcare products. However, the men’s apparel category showed some encouraging signs in an otherwise weak apparel market in 2012. According to Euromonitor, French men are highly particular about what they wear in terms of clothing, fragrances and cosmetics. Moreover, they tend to spend more on apparel products compared to women. There has been a change in the shopping trend in the region as more men are buying apparel for themselves while historically, women used to shop for them.  Gap can leverage this trend to facilitate the sales of its men’s products in the region.
Additionally, fast-fashion and affordable brands have become a viable option in France, which is evident from the success of Vivarte, KIABI Europe and Hennes & Mauritz. Gap can revive its sales by remaining responsive to changing fashion trends and offering products at competitive prices. Also, online retailing continues to grow at a robust pace despite the lull in the overall apparel industry. With online shopping becoming easier, and as buyers have access to a greater variety of products, French shoppers are making more purchases through e-commerce websites.  Gap can take advantage of this trend and promote its direct-to-consumer channel aggressively in the region.
The economy of France is showing some signs of improvement with renewed consumer confidence.  In the second quarter of 2013, the country’s economy expanded by 0.5% which was its best gain since January 2011. Even as investments dropped, the rise in consumer spending and increased business output drove the region’s better-than-expected growth. However, French GDP growth remained flat in the third quarter suggesting that the economic environment is still uncertain and retailers might have to struggle in the near future. In all, the apparel market in France totals roughly $50 billion.
The U.K. Market Is Growing
Due to low disposable income, high promotions and changing shopping trends, the apparel market in the U.K. witnessed only marginal growth in 2012.  Shopper’s not only lowered their spending on apparel products but also started buying clothing and footwear that can be used for multiple occasions. However, the market remains large at around $59 billion and has seen positive growth for the past four years despite the economic downturn. Growth is likely to accelerate going forward fueled by growing online retail sales. The U.K. apparel market is expected to grow at a compound annual growth rate (CAGR) of 3% through to 2017, which will bring it to $69 billion. 
Lately, a number of brands in the U.K. have focused on multi-channel retailing by primarily targeting e-commerce as a channel. They have been updating their websites to handle more traffic and make shopping experience more convenient. This move makes sense given that about 72% of adults used the Internet for shopping in 2013, compared to the 53% figure in 2008. Moreover, Internet access through mobile devices has doubled over the last three years.  Growing brand promotions through social media channels and the launch of new product portfolios are likely to have a positive impact on the apparel market. Gap can take assurance from these factors and remain focused on the region for long term benefits.Notes:
- Gap Inc’s SEC filings [↩]
- Apparel in France, Euromonitor International, Sept 2013 [↩] [↩]
- Apparel Retail In France, Market Research, Feb 27 2013 [↩]
- Apparel in the United Kingdom, Euromonitor International, Aug 2013 [↩]
- United Kingdom – Apparel, Accessories & Luxury Goods, Datamonitor Research Store, Mar 12 2013 [↩]
- Internet Access – Households & Individuals, 2013, Office For National Statistics, Aug 8 2013 [↩]