Gap Earnings Preview: Revenues To Increase Steadily Despite Traffic Decline; Omni-Channel In Focus
Gap Inc (NYSE:GPS) has been among the few apparel retailers in the U.S., who have performed very well despite the prevailing weakness in consumer confidence and intense competition from fast-fashion retailers. Although it has not reported significant growth in its revenue metrics over the past several quarters, its growth has been positive, unlike several of its counterparts. While the company’s affordable brand Old Navy has consistently grown at a robust paces, it has been offset by underperformance of relatively expensive brands, Gap and Banana Republic. Gap Inc’s results will yet again reflect a similar trend when it comes out with its Q4 fiscal 2014 earnings on February 26th. (Fiscal years end with January.) In a press release earlier this month, the retailer stated that its fourth quarter comparable sales increased 2% year over year, on top of 1% growth registered in the same quarter last year. Comparable sales at Old Navy increased by a hefty 11%, while Gap reported a decline of 6% on the same metric and comparable sales at Banana Republic increased a paltry 1%. [1]
Our price estimate for Gap Inc is at $50.51, implying a premium of over 25% to the market price.
See our complete analysis for Gap Inc.
Overall, the apparel and accessories industry grew 3.6% during the quarter and Gap Inc’s growth was a little behind at 3%. This can be attributed to the fact that most of the growth in the industry came from a surge in online sales, while Gap Inc still relies on store sales for a major share of its revenues. Foot traffic across the industry was down significantly for the three month period because of the ongoing online shift. During the holiday season, industry wide foot traffic fell a sizable 8.3% year over year, according to data compiled by RetailNext. [2] In the subsequent month, the foot traffic decline remained intense at 7.7%, implying that store based retailers had a tough time during the quarter.
Looking at the substantial fall in number of potential buyers for Gap Inc, its growth actually looks pleasing. It appears that the retailer has made considerable progress on its omni-channel portfolio, which is helping it attract shoppers across the channels by offering the best of both online and physical stores. During the earnings conference, it will be interesting to find out how expansively Gap Inc has rolled out its omni-channel initiatives and what has been their impact so far.
At the end of Q3 fiscal 2014, CEO Glenn Murphy had mentioned that the company has installed WiFi in over 1,000 stores, which is allowing store shoppers to access the retailer’s mobile apps and websites. Although the scale of WiFi deployment has been huge so far, Gap Inc still has around 1,500 stores without WiFi. The company plans to add this feature to a number of its stores in Q1 fiscal 2015. Another attribute of omni-channel retailing that has been contributing to Gap Inc’s store productivity is the “reserve in store” facility. Buyers are given the option of reserving a particular set of apparel online to try out in stores. Since browsing through products is much easier online and this feature allows customers to try the clothes before buying, “reserve in store” has been somewhat of a revelation for Gap Inc. We believe that the retailer will aggressively roll this service out going forward.
Since Gap Inc has already released comparable sales growth metrics for its main brands, it will be interesting to see how its younger brands (Athleta, Intermix, etc.) fared during the quarter. Though their contribution is insignificant at the moment, they will play a crucial role in the long run and help Gap Inc gain share in the saturated U.S. apparel market. The company has been expanding these brands aggressively over the past several quarters, which most likely continued in the recently concluded quarter as well. It will be very interesting to see how the retailer plans the expansion of these brands (especially Athleta), given that the future of store shopping seems to be dimming, but the brands still need an optimum presence in the country. Athleta had 92 stores operational at the end of the third quarter of fiscal 2014.
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Notes:- Gap Inc. Reports January And Fourth Quarter Results, Gap Inc, Feb 9 2015 [↩]
- Holiday season U.S. store sales down 8 percent in 2014: RetailNext, Reuters, Jan 7 2015 [↩]