Gap Inc Fails to Match its June 2013 Performance in an Uneven Retail Market

by Trefis Team
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While Gap Inc (NYSE:GPS) exhibited tremendous resilience against the edgy retail environment last year, fiscal 2014 has been somewhat sluggish. The retailer’s sales in February and March were subdued by extreme temperatures across most parts of the country that prevented buyers from visiting stores. However, the company’s growth rebounded in April as its comparable sales jumped 9% primarily driven by pent-up demand. This trend persisted in May as U.S. buyers continued shopping aggressively to fulfill their apparel needs. The company’s revenues increased by 4% during the month and its comparable sales rose by 1%. [1]

Although Gap Inc’s sales trends through to May suggested that the retailer is gaining momentum after a slow start to the year, it came across an unexpected roadblock in June. The retailer surprised many when it reported 2% decline in comparable sales in June, which was worse than analysts’ prediction. Gap Inc’s spring sales did not turn out as expected, resulting in 7% comparable sales decline at Gap and Banana Republic. Even though Old Navy recorded 7% increase in comparable sales, it wasn’t strong enough to pull Gap Inc out of its slump. [2]

While the retailer’s results look disappointing, it must be noted that it had a tough comparable period (June 2013) to match. June 2013 was one of the best months in terms of consumer confidence in over six years, which helped Gap Inc record healthy growth across all its brands. Although the current economic scenario isn’t too bad either, buyers are still not comfortable with spending too much on relatively expensive apparel. That’s the reason why Gap Inc’s Old Navy did well and other brands didn’t.

Our price estimate for Gap Inc is at $50.50, implying a premium of about 25% to the market price.

See our complete analysis for Gap Inc.

The Comparable Period Was Tough

Gap Inc’s sales are somewhat related to the macro-economic trends in the U.S., given that it is one of the biggest apparel chains in the country. The answers to its dingy June performance lie in the fact that U.S. buyers weren’t as confident in spending in June 2014 as they were a year earlier. While the U.S. consumer confidence in June 2014 stood high at 81.2, it was well below June 2013′s figure of 85, which was the highest in over six years. [3] This indicates why Gap Inc performed very well in June last year. The retailer’s overall comparable sales had increased by 7% in June 2013 with 5% growth at Gap, 1% growth at Banana Republic and 13% rise in comparable sales at Old Navy. [2] Due to slightly rougher environment in June this year, Gap Inc was not able to match its stellar June 2013 performance. However, we do not attribute the retailer’s dismal performance entirely to the sluggish macro-economic environment. There exists a possibility that Gap Inc might have made a few off-pitch fashion calls. We will have to wait for its Q2 earnings call to find out.

Old Navy’s Price Points Helped its Results

Retail sales growth in June 2014 wasn’t bad across the board. There were some retailers who performed well. Last week, Wal-Mart (NYSE:WMT) U.S. president, Bill Simon, stated that foot traffic in the retailer’s stores was recovering owing to an improvement in the job market. Unemployment rate in the U.S. fell to 6.1% in June, which is its lowest value in more than six years. [4] Kroger’s CEO, Rodney McMullen, made a statement in June that shoppers were exhibiting less cautious spending behavior. Warehouse giant, Costco (NASDAQ:COST), recently reported its June sales results with 6% rise in its same-store sales. Affordable teen apparel retailer, Zumiez, reported better-than-expected 3.1% growth during the month. [5]

By looking at Gap Inc and aforementioned retailers’ results, we conclude that retailers who offer cheaper products saw their sales go up in June, while relatively expensive players struggled. This is the reason why Gap Inc’s Old Navy recorded 7% comparable sales growth on top of 13% growth seen in the same month last year. Old Navy is the retailer’s cheapest brand, which offers on-trend casual clothing for value to trend conscious high school and college students. With its affordable clothing and popular “ath-leisure” apparel, Old Navy was the only bright spot for Gap Inc during the month. [6] The brand operates more than 1,000 stores in the U.S., which helped it offset the impact of significant comparable sales decline at Gap and Banana Republic.

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Notes:
  1. Gap Inc Reports May Sales Results, Gap Inc, Jun 5 2014 []
  2. Gap Inc Reports June Sales, Gap Inc, Jul 10 2014 [] []
  3. United States Consumer Sentiment, Trading Economics []
  4. Labor Force Statistics from the current Population Survey, Bureau Of Labor Statistics, Jul 11 2014 []
  5. Slowing Customer Traffic Worrying U.S. Retailers, The Wall Street Journal, Jul 10 2014 []
  6. Gap Falls After Unexpected Drop In June Same-Store Sales, Bloomberg, Jul 12 2014 []
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