Gap Inc’s To Close 175 Gap Stores In An Effort To Boost Its Profitability

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Apparel major Gap Inc (NYSE:GPS) recently unveiled plans to close 175 of its specialty Gap stores over the next few years, in order to rightsize the brand’s store fleet. Alongside, the company plans to lay off 250 employees from its headquarters to realign its staff structure with respect to the new operating model. The brand has been struggling with poor customer response and weak store traffic for some time now and the recent plans are expected to bolster its productivity and profitability. Also, store consolidation makes sense from the perspective of an omni-channel model, which appears to be the future of retailing in the U.S.

Out of the 175  planned closures, Gap Inc intends to shut down 140 this year and the remaining stores in subsequent years. At the end of the consolidation, Gap will have a total of 800 stores, a level which other apparel retailers have deemed fit for the U.S. market from the point of view of self-cannibalization and omni-channel retailing. [1]

Due to the closure of these stores, the company expects to lose about $300 million in annual sales.  It will also post one-time charges of $140 million-$160 million related to lease buy-outs, asset impairments, inventory write offs and severance pay for employees. Although Gap Inc will lose significant amount of money related to these store closures, it expects to gradually offset this loss with annualized savings estimated at $25 million.

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Our price estimate for Gap Inc is at $47, implying a premium of about 20% to the market price.

See our complete analysis for Gap Inc.

Back in 2014, Jeff Kirwan was hired to lead Gap out of its slump and his store consolidation plan appears to be a valid move. Yes, the company will lose revenues due to the absence of these stores, but it can reduce its SG&A expenses at a faster rate by targeting underperforming outlets. In the long run, a bulk of revenues for apparel retailers will come from online and omni-channel retailing, so eventually revenues lost due to store closures will become insignificant. Annual savings on the other hand will go a long way in bolstering the company’s margins and cash. In fact, several loyal customers from Gap’s closed stores are likely gravitate to its websites or other nearby locations, which should dilute the impact of revenue loss.

However, in order to make this work, Gap Inc needs to ensure that it can draw substantial customer attention to its websites. For the purpose, it needs to keep pushing towards its omni-channel goals. The retailer has been among the few apparel companies in the U.S. who have proactively deployed omni-channel strategies such “buy online pick at store”, “reserve online”, “ship from store”, etc. While Gap Inc has seen some success with these strategies, it needs to roll them out on a larger scale for a stronger impact. While omni-channel strategies and store fleet rightsizing will get Gap’s operating model right, it will need ample support from the product side as well.

A while back, Gap Inc hired Wendy Goldman, who had previously worked with Victoria’s Secret, as the executive vice president of Gap’s product design and development team. Soon after her arrival, management assured that the brand’s shortcomings had been diagnosed effectively and the design and merchandising team was proactively working to address the issue. The retailer said that at the base of Gap’s problems were several merchandise lines that were off-brand and off-trend, which drove customers away. With a fresh perspective, Gap Inc believes that these problems will be resolved quickly, and the brand’s women’s business will soon be back on track. Gap’s kids, baby and men’s businesses are already performing well and women’s revival will do wonders for its growth.

It appears that Gap Inc is leaving no stone unturned to pull its namesake brand out of the slump, and with consistent progress, we may see some improvement in the near term.

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Notes:
  1. Gap Inc Announces Strategic Initiatives to Increase Productivity and Profitability of Namesake Brand, Gap Inc, Jun 15 2015 []