Easter Shift And Currency Headwinds Thump Gap Inc’s April Results

-34.41%
Downside
27.55
Market
18.07
Trefis
GPS: Gap logo
GPS
Gap

Despite the Easter shift from April to March this year on Gap Inc’s (NYSE:GPS) retail calendar, it wasn’t able to post positive gains for its struggling premium brands – Gap and Banana Republic in March. It was certain that April 2015 was going to be worse for the company, as the comparable prior year period (April 2014) had accounted for higher sales around the Easter weekend. Gap Inc’s recently released sales results have confirmed this. The retailer reported that its comparable sales for the four week period ended May 2 declined a onerous 12% due to continued under-performance of premium brands, the early Easter and also, negative currency headwinds.

Gap Inc’s relatively expensive brands – Gap and Banana Republic, which contribute almost 60% to its value as per our estimates, have been struggling for some time now, as buyers have moved to other equally expensive but relatively fashion forward brands such as Zara and Forever 21. The retailer’s brands have consistently reported negative comparable sales change due to weak customer response, low store traffic and the ongoing shift from store to online shopping, where the company’s presence isn’t as strong. Fortunately, Old Navy has managed to offset the impact of sales decline of the other two brands. Unlike its counterparts in the industry, the brand has managed to attract customers with its affordable basic merchandise by effectively leveraging its design team and staying in-line with consumer preferences. While Old Navy grew strongly in March backed by Easter Shift and continued strength in store and web traffic, its growth faltered in April. [1]

Our price estimate for Gap Inc is at $52, implying a premium of about 35% to the market price.

Relevant Articles
  1. Does Gap Stock Have More Room To Run After Rising 67% This Year?
  2. Gap Q2 Earnings: What Are We Watching?
  3. Gap Stock Has Upside Potential To Its Pre-Inflation Peak
  4. Gap’s Stock Looks Expensive At $14
  5. Will Gap Stock Trade Lower Post Q3 Results?
  6. Gap’s Q2 Earnings Preview: What Are We Watching?

See our complete analysis for Gap Inc.

In March, even when Gap and Banana Republic had a relatively favorable comparable period (which did not include sales around the Easter weekend unlike March 2015), Gap reported 7% decrease in comparable sales and Banana Republic posted 3% decline. April was understandably going to be worse for these brands as the comparable period was tougher than usual. During the month, Gap’s comparable sales fell 15% and Banana Republic also reported a similar decline. Even Old Navy registered 6% decline in comparable sales during the month, but that was mainly because its comparable sales had increased by a hefty 18% in the year ago period and matching such a performance without the Easter weekend was going to be very hard. 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.

Apart from the shift in holiday timings, Gap Inc said that currency headwinds also had a negative impact on its April growth. The retailer said that strong dollar had a negative impact of almost $90 million on its first quarter sales. A lot of companies with global operations have been struggling for growth lately as dollar has appreciated significantly against other currencies and it is likely sustain this momentum throughout 2015. For Gap Inc, international sales account for over 20% of its overall revenues and even though it is growing in its international markets in constant currencies, that growth isn’t translating into growth in revenues. The retailer mentioned that weakening of Japanese yen and Canadian dollar were among the main factors responsible for its sluggish growth.

Gap Inc cannot do anything about the negative currency headwinds and its Old Navy brand remains strong despite the fall in comparable sales in April. The area which needs significant work is the merchandise portfolio of Gap and Banana Republic. Given the retailer’s history of being on top of fashion changes, we believe that it can address this issue in the near future, but it needs proactive efforts from design and supply chain. In fact, the company had hired a new head of Design and Product Development for Gap earlier this year, with a view point of providing a fresh perspective to its iconic mainline brand. Wendy Golden, having 11 years of experience with L Brands (NYSE:LB) and eight years of earlier experience with Gap Inc  was appointed to this position. L Brands is famous for its design innovation and Ms.Golden knows Gap Inc very well, judging by her previous experience with the company. Combining both these aspects paints a promising picture for Gap’s merchandise design, though it may be a while before we see any notable impact on the brand’s growth.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap |More Trefis Research

Notes:
  1. Gap Inc Reports April and First Quarter Sales Results, Gap Inc, May 11 2015 []