Old Navy Surge Lifts Gap Inc’s Holiday Sales While Other Brands Disappoint

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Apparel major Gap Inc (NYSE:GPS) recently stated that its net sales for the two month holiday period increased by 4%, which was roughly inline with the National Retail Federation’s industry growth forecast. Despite the weakness in its namesake brand, Gap Inc registered 3% growth in comparable store sales during the season, primarily driven by 12% growth at Old Navy. Even though Gap Inc is one of the more popular apparel brands in the country, its growth has been uneven 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. In November, while Banana Republic managed a paltry comparable store sales growth of 2%, Gap’s comparable store sales fell by 4%. [1] In the subsequent month, Banana Republic’s comparable store sales remained flat and Gap witnessed a decline of 5% in this metric. [2]

On the contrary, Old Navy’s performance has been astonishing. In November, the brand recorded 18% growth in its comparable store sales, followed by 8% growth in the consecutive month. This was a big improvement compared to a year ago period. Gap Inc has adapted to U.S. buyers’ changing spending patterns to push its cheapest brand. In the aftermath of the economic downturn, the U.S. consumers cut down significantly on their impulse buying and have been spending very cautiously. They have restrained spending on expensive apparel brands, unless they are offered fashion-forward products that justify the premium prices. In the wake of changing shopping trends, Gap Inc’s Old Navy brand has become very popular among buyers looking for a balance between prices and designs.

Old Navy accounts for close to 40% of the company’s value as per our estimates and hence, is a significant arena for the company to focus on. Given that buyers are no longer fond of spending too much on apparel, Old Navy will most likely continue to grow at a robust pace. That said, the company cannot ignore the importance of Gap and Banana Republic, as they account for over 60% of the value. Gap Inc needs to find a way to get its relatively expensive brands back on track, because Old Navy alone may not be able to drive the company for long.

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Our price estimate for Gap Inc is at $50.51, implying a premium of about 20% to the market price.

See our complete analysis for Gap Inc.

Old Navy mainly offers casual clothing at affordable prices for value and trend conscious high school and college students. The website reflects an array of vibrant colors and features different products under discounts every week. [3] What differentiates Old Navy from other similar causal apparel brands such as Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO), is its consistency. While Aeropostale and American Eagle have lost several customers due to their persistent focus on basic products and certain merchandise goof ups, Old Navy has maintained a portfolio that is more than just basic apparel. The brand shuffles between various categories such as women’s dresses, jeans for the entire family, swim suits, flip flops, etc., regularly and thus  covers a wider customer base while maintaining interest in the brand. Moreover, Old Navy’s product launches have mostly been inline with changing trends and seasons, enabling it to serve its customers better. Also, due to its vast store network, Old Navy is a better known brand in the country as compared to Aeropostale and American Eagle. It operates over 1,000 stores across the country with an average area of more than 17,000 sq. ft., compared to just over 800 significantly smaller stores for Aeropostale and American Eagle. Understandably, buyers have preferred Old Navy over other affordable casual apparel retailers, with is evident from its impressive holiday performance.

However, Gap Inc’s other brands, especially Gap, have not exhibited the same strength. At Gap, the company offers its products at higher prices than Old Navy and targets working professionals along with teenagers. While the target audience is big, fierce competition from fast-fashion brands such as Zara and Forever 21 comes into play. These brands have troubled almost all the specialty players in the U.S. with their expansive and intriguing product variety, and reasonable prices. Gap Inc needs to find a way to fend off competition from these players, because it cannot rely on a single brand for a bulk of its growth.

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Notes:
  1. Gap Inc Reports November Sales Results, Gap Inc., Dec 4 2014 []
  2. Gap Inc Reports Holiday Sales Results, Gap Inc., Jan 8 2015 []
  3. Old Navy []