Gap Inc Earnings Preview: Positive Growth To Continue Despite The Industry Slump

by Trefis Team
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Over the past one year, several apparel retailers in the U.S. have struggled to achieve positive revenue growth primarily due to low consumer spending on apparel and accessories. However, Gap Inc (NYSE:GPS) has been resilient to this environment, with its appealing product portfolio, solid brand image and a strong direct-to-consumer channel. The retailer’s comparable sales increased by 2%, 5% and 1% respectively, during the first three quarters of fiscal 2013, and this trend continued in the fourth quarter as well.

In a recent press release, Gap Inc stated that its comparable sales for the quarter ending in January 2014 increased by 1% on top of 5% growth last year. [1] While the growth was moderate, it is impressive considering that this year’s holiday season witnessed a huge decline in foot traffic, and consumer confidence was particularly weak. Also, the company issued its fourth quarter EPS guidance in the range of $0.65-$0.66, which was much better than analysts’ expectation of $0.60. We believe that apart from its appealing product offerings, Gap Inc’s strong direct-to-consumer channel and surge in online orders during the holiday season helped its results. We’ll look for additional details on these results during the company’s earnings call scheduled on February 27.

Our price estimate for Gap Inc is at $50, implying a premium of about 20% to the market price.

See our complete analysis for Gap Inc.

Weak Macroeconomic Environment And Extreme Weather Summed Up A Weak Q4

Due to the impact of increased taxes, slow job growth, changing spending patterns, higher healthcare costs and gasoline prices, U.S. buyers spent cautiously last year. This was clearly visible in the holiday season as the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from venturing in store shopping. As a result, U.S. foot traffic declined by 17.7% in December 2013 as compared to the same month last year. [2] Overall, foot traffic during the holiday season decreased by a staggering 14.6%, which was significantly higher than ShopperTrak’s earlier prediction of 1.4% decline. [3] [4] Also, while U.S. buyers spent freely on electronics, furniture and building materials, they were hesitant to spend on clothing. According to a Reuters poll conducted before the holiday season, about 27% of consumers were planning to lower their spending on apparel this holiday season. [5]

In January, the retail growth failed to pick up as consumer confidence slipped, and the U.S. witnessed record cold and heavy snowfall that prevented store visits. The Thompson Reuters/University of Michigan’s consumer sentiment index fell to 81.2 in January from 82.5 in the previous month. [6] As a result, there was intense competition in the apparel industry to capture a sizable share of the low U.S. consumer spending during the fourth quarter.

However, Gap Inc Was Resilient

Lately, U.S. buyers have been mostly opting for brands that provide latest fashion at affordable prices. Gap Inc has managed to attract customers with is strong inventory management and fashion responsiveness. The company offers something for every demographic, ensuring that it drives both, price conscious as well as more affluent buyers to its stores.

Gap sustained a steady 1% comparable sales growth throughout the fourth quarter. Old Navy’s comparable sales picked up in January (+3%) after declining 2% in December, and remained flat during the quarter. Interestingly, Gap Inc’s luxury brand Banana Republic was able to match its previous year’s sales levels in December even when U.S. buyers scaled back their spending on apparel products. [7] Overall, the company’s comparable sales increased by 1% during the holiday season, while several of its counterparts registered sales decline.

In the holiday season, Gap Inc ran a successful “Make Love” campaign featuring cultural icons like Tony Bennett, Cindy Lauper  across print, outdoor, social, cinema and digital media for a wider reach. [8] This might have also helped Gap Inc drive store and web traffic during Q4 fiscal 2013.

Online Shopping To Help Growth

During the period of 2009-2012, Gap Inc’s direct-to-consumer sales increased by more than 20% annually. This helped the company’s e-commerce revenue share rise from 9% to 14% during the same period. Apart from the overall industry growth, Gap Inc’s appealing products, its mobile apps, mobile optimized sites, ship-from-store and reserve-in-store services contributed to this growth. Since U.S. buyers preferred to shop online over store shopping this holiday season, we believe that Gap Inc’s direct channel will have a positive impact of this this trend.

United Parcel Service (NYSE:UPS), which is one of the biggest players in e-commerce delivery struggled to ship orders before Christmas. [9] Apparel retailer Abercrombie & Fitch (NYSE:ANF) saw the revenue share of its direct business escalate from 16% to 25% in December. Extreme weather conditions continued to keep U.S. shoppers away from stores during the month of January. This could have helped Gap Inc’s e-commerce growth in January as well. [10]

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Notes:
  1. Gap Inc Reports January And Fourth Quarter Results, Gap Inc, Feb 6 2014 []
  2. Retailing Today: December 2013, ShopperTrak, Jan 8 2014 []
  3. Retailers See Fourth Consecutive Quarter Annual Sales Increase During 2013 Holiday Season, ShopperTrak, Jan 8 2013 []
  4. ShopperTrak Expects Holiday Sales Will Increase In 2013, ShopperTrak, Sept 17 2013 []
  5. U.S. holiday sales expected to rise less than last year: ShopperTrak, Reuters, Sept 17 2013 []
  6. U.S. retailers’ sales chilled by weather, and low consumer confidence, Reuters, Feb 6 2014 []
  7. Gap Inc Reports Holiday Sales Results, Gap Inc, Jan 9 2014 []
  8. Give Love With Gap This Holiday Season, Gap Inc, Nov 18 2013 []
  9. Behind UPS’s Christmas Eve Snafu, The Wall Street Journal, Dec 26 2013 []
  10. U.S. retailers’ sales chilled by weather, and low consumer confidence, Reuters, Feb 6 2014 []
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