How Big Is This Holiday Season For Gap?

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As for any other retailer, the holiday season is a crucial time for Gap Inc (NYSE:GPS) as well. When buyers open up their wallets driven by festive mood and holiday spirit, most retailers end up earning close to 20% of their annual revenues during the months of November and December. Understandably, retailers across the market go aggressive on discounts and deals during the season, in order to drive customers to their stores and websites. The competition in the market, which is fierce throughout the year, intensifies during the holiday season. Over the past couple of years, casual apparel retailers have struggled to attract customers, on account of increasing buyer affinity towards fast-fashion brands and an overall weakness in consumer spending on apparel. To make things worse for retailers who rely on store sales for a bulk of their revenues, U.S. shoppers in numbers have been switching from store shopping to online shopping.

Despite being one of the biggest and most popular apparel brand in the country, Gap Inc’s growth has faltered lately as buyers have eluded its relatively expensive Gap and Banana Republic brands, for equally expensive fashion forward products from Zara, H&M and Forever 21. Moreover, the company has a store base of close to 2,500 stores, where footfall is declining consistently in the wake of growing web shopping popularity. E-commerce revenues contribute close to just 10% to Gap Inc’s revenues, and hence aren’t capable of driving the retailer’s growth. Considering all these factors, we believe that this year’s holiday season is going to be very crucial for the company. Gap Inc’s performance during the season will pave the way for its future expansion. If foot traffic remains weak throughout the season and online sales continue to grow at a robust pace, it may help the retailer decide the future course of action for its store consolidation and omni-channel strategies. Hence, we think it’s worth finding out what growth the company can attain during the holiday season of 2014.

Our price estimate for Gap Inc is at $50.51, implying a premium of more than 25% to the market price.

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See our complete analysis for Gap Inc.

Overall retail sales grew by 3.1% in last year’s holiday season (November and December 2013), and net apparel and accessories sales increased by 2.3% during the same period. [1] [2] Sales in the apparel sector lagged overall retail growth by almost 80 basis points. Gap Inc reported sales of $3.68 billion for the nine weeks period of holiday season 2013, while overall apparel and accessories market during November and December stood at $41.61 billion. [3] This gives us a market share for Gap Inc during 2013 holidays of 8.84%. [4] This year, the National Retail Federation expects overall retail sales to increase by 4.1%, and given that spending patterns haven’t changed much over the last one year, we expect growth in apparel and accessories sales to trail the retail market growth by a margin similar to last year (80 basis points). This implies that apparel sales can increase by around 3.3% in November and December 2014. This gives a potential apparel market size of $43 billion for the holiday season of 2014.

To calculate Gap Inc’s sales during the season, we assume that the company might have gained some market share from retailers such as American Eagle Outfitters (NYSE:AEO), Aeropostale (NYSE:ARO) and Abercrombie & Fitch (NYSE:ANF), whose sales are rapidly falling. In fact, the company recently reported its November sales results with 5.5% growth in revenues, stating that customer response to product assortments was excellent. Assuming that Gap Inc’s market share this season will increase to 8.95%, we arrive at a estimated sales figure of 3.85 billion, which reflects a year over year growth of almost 4.5%. The growth potential in revenues looks good, and it indicates that the company can offset the impact of fickle consumer behavior and online shift, with compelling fashion assortments and omni-channel retailing.

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Notes:
  1. Optimism Shines as National Retail Federation Forecasts Holiday Sales To Increase 4.1%, NRF, Oct 7 2014 []
  2. Clothing and Clothing Accessories Stores, United States Census Bureau []
  3. Gap Inc Reports Holiday Sales Results, Gap Inc, Jan 9 2014 []
  4. Actual apparel market share in the U.S. will be lesser than this value considering that Gap Inc’s revenues also include international sales. Since the breakup is not available, we have used the overall figure for the purpose of calculation []