Gap Beats On Profits, Raises Outlook And Gets Aggressive On Asian Expansion

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Gap Inc‘s (NYSE:GPS) shares increased marginally after its Q2 fiscal 2014 profits increased by 10%, beating analysts’ estimates by more than $25 million. For the quarter ending in July, the retailer reported net profits of $332 million, or $0.75 per share, up from $303 million or $0.64 per share a year earlier. Analysts polled by Thomson Reuters were expecting Gap’s earnings per share to be around $0.69. The retailer’s revenues increased by 3% to $3.98 billion, which was slightly better than the consensus estimate of $3.96 billion. [1] However, Gap’s comparable sales remained flat as an increase at Old Navy was offset by a decline at Gap and flat sales at Banana Republic. Nevertheless, encouraged by steady growth in Old Navy, the company raised its full year EPS guidance by 5 cents. It now expects EPS for 2014 to be around $2.95-$3.00, up from its previous outlook of $2.90-$2.95. Although customers are spending less on Gap’s relatively expensive brands, they have resonated very well with its affordable brand Old Navy, which has boosted its growth.

Following these results, the company unveiled plans to ramp up its expansion in Asia, which houses some of the most promising apparel markets in the world. Along with its earnings release, the company announced that it will enter India through a franchise agreement in 2015 and will look to open a total of 40 stores in the country. [2] India is a lucrative market for the company given that its brand awareness is high and about half of the country’s 1.2 billion population is under 25 years of age. Also, the company is aiming to open a total of 110 namesakes stores this year in China. Currently, Asia contributes just 9% to the retailer’s revenues, but sales in the region have been growing strongly. With continued growth and the recent expansion plans, this figure is likely to go up in the future.

Our price estimate for Gap Inc is around $51, implying a premium of about 10% to the market price. However, we are in the process of updating our model to include the recent earnings release.

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40 Franchise-Operated Stores Coming In India

Gap Inc said that it plans to enter India in 2015 with franchise-operated stores of its namesake brand. The company is partnering with Arvind Lifestyle Brand Limited, a subsidiary of Arvind Limited, which is among the largest textile companies in India. The retailer will begin its expansion in two of the largest cities, Mumbai and Delhi, and will subsequently move to other locations. Gap will initiate its operations in the country with its 2015 summer collection for adults, kids and babies. Gap is one of the few American casual apparel brands that are very well known in India. The company understands the market well as it has been sourcing goods from India for decades. The global president of Gap said that India, being an emerging vibrant market, holds tremendous promise for the brand.

India’s apparel market stood at $40 billion in 2011 and is expected to reach $120 billion by 2020, with rapid economic growth. [3] [4] Rising urbanization is likely to be one of the key growth drivers as urban consumers often want different clothes for different purposes and events. In 2010, only about 29% of the country’s population resided in the urban areas, but that figure increased to 31% during the next two years. [5]

A big chunk of the country’s growing urban population will be younger people who want trendy clothing to match their new lifestyle and higher discretionary income. A 2010 McKinsey survey suggested that about 62% of Indian buyers felt that their clothing should reflect ongoing fashion trends. Additionally, as more women move to cities and gain employment, female customers will increasingly shop for professional and casual attire. [4] With increasing foreign exposure and the Western influence, the proportion of branded apparel sales is expected to go up to 35% by 2020 from 25% in 2011. [3]

110 Gap Stores in China this Year

Gap Inc is on track to open 110 namesake stores in China by the year end. It believes that over the course of next three years, sales in China will triple to $1 billion. Although the Chinese apparel market is currently struggling on account of a consumer spending pullback, it is set to boom in the long term. With rising disposable income and growing urbanization, the market grew from $110 billion in 2009 to $140 billion in 2012, and is expected to touch $220 billion by 2016. [6] Within the market, casual wear is among the biggest and fastest growing apparel segments. A 2012 AT Kearney report estimated the women’s casual wear market to be at $67 billion and the men’s casual wear market to be around $56 billion. The same report projected their CAGR (compound annual growth rate) for the period of 2012-2016 at 15% and 17%, respectively. Fashion casual wear sales account for about two-thirds of overall casual wear sales, which suggests that the addressable market for Gap is large at around $95 billion (estimated figure for 2013). The fashion casual wear market is expected to grow at a CAGR of 15% for the next few years, indicating that it will remain ahead of the overall market growth. [7]

Gap Inc already has a well established footprint in China and its brand awareness is close to 70%, which is significantly more than most peers. Therefore, the company should not have much difficulty generating strong sales through its new stores.

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Notes:
  1. Gap raises forecast; to open 40 stores in India, Reuters, Aug 21 2014 []
  2. Gap Inc. Announces Plans to Extend International Presence in India through Franchise Agreement, Gap Inc, Aug 21 2014 []
  3. Indian Apparel Market: Current Status And Future Outlook, Confederation of Indian Textile Industry, Sept 27 2012 [] []
  4. India’s Fast-Growing Apparel Market, McKinsey & Company, June 2012 [] []
  5. Urban population in India jumps to 31%, The Indian Express, Aug 22 2012 []
  6. B2C Ecommerce Sales Climbs Worldwide, as Emerging Markets Drive Higher Sales, eMarketer, Jun 27 2013 []
  7. Winning in China’s Apparel Market, AT Kearney []