Gap Inc Earnings Preview: Underlying Performance, Omni-Channel Business In Focus As Sales Remain Weak

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Gap Inc (NYSE:GPS) is scheduled to report its Q1 fiscal 2015 earnings on August 20th, but it has already released its sales growth metrics for the quarter. In a press release earlier this month, the retailer announced that its net sales on a reported basis were flat versus last year, pummeled by continued weakness in premium brands, the strengthening dollar (negative impact of $100 million), and the closure of under-performing stores. The company has faltered of late due to rising competition from fast-fashion players and the significant customer shift to the online channel, where its presence is limited.

From a long-term perspective, improvement in Gap and Banana Republic’s design-price balance is imperative for the company. Also, international expansion, and the development of an omni-channel platform are a few aspects that can help the company sustain its growth. When the retailer comes out with its detailed earnings report, we will be closely watching the issues related to its premium brands and their underlying performance, the execution of omni-channel strategies, growth outside North America and progress on the online front. For the second quarter, Gap Inc expects to report earnings per share in the $0.63-$0.64 range, excluding the $0.12 per share negative impact of certain strategic actions. [1]

Our price estimate for Gap Inc is $47, implying a significant premium to the market price.

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See our complete analysis for Gap Inc.

Premium Brands Have To Improve

For a while now, Gap and Banana Republic have failed to entice customers, with Gap’s global comparable sales falling 6% and Banana Republic’s comparable sales falling 4% in the most recent quarter. Old Navy’s 3% comparable sales growth was unable to offset the impact, and company-wide comparable sales came down 2%. While the company has made several efforts to improve the design component of Gap and Banana Republic, there has not been a notable impact, which may imply that the company needs to review its pricing strategies. In the present environment, with access to many online options, U.S. buyers have become extremely price-conscious, and Gap Inc needs to adapt to this change. It should be encouraged by the continued success of its affordable Old Navy brand.

Omni-Channel Progress In Focus

With foot traffic across the industry declining drastically and many buyers switching to online shopping, several apparel retailers in the U.S. have started adopting omni-channel retailing. Gap Inc’s progress on this front has been good so far, but it will likely be years before the strategy starts yielding notable results. Nevertheless, it is important that the company leaves no loose ends as it moves towards this; competition in the omni-channel area is likely to persist, so Gap needs to make sure that it executes its omni-channel strategies efficiently. The company has launched several multichannel initiatives in the past, including “reserve online”, “buy online, pick up at stores” and others. It has been steadily expanding these services in its stores, to drive online shoppers to stores – and vice-versa – on a larger scale. During the upcoming earnings call, we will focus on the progress on the company’s existing strategies and the potential for new initiatives.

International Growth Encouraging

Gap Inc’s revenue growth in Europe and Asia has been significantly faster than its growth in North America. Between 2009-2014, while Gap’s revenues in North America increased at a compound annual growth rate (CAGR) of 0.7%, its sales in Europe and Asia increased CAGRs of 4% and 12%, respectively. For Banana Republic, revenue growth in North America, Europe and Asia during the period has been 4%, 31% and 11%, respectively. Old Navy initiated its international expansion in Japan just a few years ago, and it has seen good response so far.

Unlike the U.S., Gap Inc has been expanding its store base steadily in Europe and Asia, which has helped boost revenues. In fact, the company’s brands still have a lot of expansion potential in markets outside of North America, which can help provide the next wave of revenue growth.

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Notes:
  1. Gap Inc Reports July and Second Quarter Sales Results, Gap Inc, Aug 10 2015 []