Even Early Easter Could Not Bring Gap Inc’s Premium Brands Out Of Their Slump
Apparel major, Gap Inc (NYSE:GPS), recently released its March sales results, which clearly showed the persistent struggle of its premium brands – Gap and Banana Republic. Gap’s global comparable sales fell 7% on top of a similar decline in the same month last year, while global comparable sales for Banana Republic were down 3% on top of 4%. What’s more alarming is that these brands were up against an easy comparable period (March 2014) that did not include the Easter holiday, but this year’s March did. Easter Saturday this year fell on April 4th, which was the last day for the month of March in Gap Inc’s retail calender. In contrast, Easter fell on April 20th last year, and additional sales around the holiday were accounted for in the company’s April 2014 results. While the shift in Easter timing had some positive impact on these brands’ results, it clearly implies that their April 2015 comparable sales growth would be worse. [1]
Our price estimate for Gap Inc is at $51, implying a premium of about 20% to the market price.
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Continued sluggish sales of these brands is a big concern for the company, as there is hardly any improvement despite all the efforts. Amid the prevailing retail environment, buyers are not spending freely on premium discretionary products as they are constantly searching for value-for-money deals, for which they are shopping at retailers who offer heavy discounts and they are even buying private label products from department stores. Those who are actually spending a fair amount on apparel are shopping at fashion-forward retailers such as Zara, Forever 21, and H&M. Ultimately, brands such as Gap and Banana Republic are losing their customer base, as they are neither too affordable, nor too advanced in terms of fashion content.
It has been over four quarters since these brands have reported positive growth. Even before that, their growth wasn’t too pleasing. While Banana Republic’s comparable sales growth has mostly been flat over the past five quarters, it has now gone negative despite the additional sales around the Easter holiday weekend. The management needs to come up with some strategies around the pricing of its Banana Republic brand to bring customers back. At the same time, the design team needs to work proactively to add fashion newness to the brand’s products consistently.
Gap’s under-performance is a much bigger disappointment for the company than Banana Republic’s slump. It is the company’s iconic brand that initially helped it transform into an apparel powerhouse, and now it is nothing more than a drag on overall growth. Another reason that is impacting Gap’s global growth, apart from its not-so-fashion-forward portfolio, are the negative currency headwinds. The dollar has appreciated significantly among other currencies over the past year, signaling the strengthening U.S. economy. For U.S. retailers such as Gap Inc, Guess (NYSE:GES), and Abercrombie & Fitch (NYSE:ANF), this has suppressed revenues coming in from Europe, Japan, and other Asian markets. Out of the three main brands, Gap is the one that has the biggest international presence, and hence, is experiencing the biggest drag from strengthening dollar.
Fortunately, Old Navy is keeping the Gap Inc’s growth afloat. The affordable brand recorded a staggering 14% growth in comparable sales in March that helped the company post a modest revenue growth of 1% and comparable sales growth of 2%. In fact, the brand has been doing the same for a while now, but Gap Inc cannot rely on one brand alone, when it has so much in its portfolio. Eventually, it will need significant growth contributions from Gap and Banana Republic.
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Notes:- Gap Inc Reports March Sales Results, Gap Inc, Apr 9 2015 [↩]