Gap Inc Sees Some Potential For Next Year But Q2 2015 Remains Weak

-26.81%
Downside
24.69
Market
18.07
Trefis
GPS: Gap logo
GPS
Gap

The continued weakness in Gap Inc‘s (NYSE:GPS) premium brands, Gap and Banana Republic, was the key feature of its second quarter earnings release. However, CEO Art Peck said that he was confident in the brands’ underlying strength and the revival strategies they are pursuing.  However, they will take time before they are likely to show some notable results in the spring of 2016. Mr. Peck said that the core of Gap and Banana Republic’s merchandise is solid, and the team is working proactively to elevate the fashion component in them. Also, Gap’s store fleet rightsizing strategy is progressing well, as the company shut 26 stores during the quarter and opened six stores at better locations. [1] [2]

On the omni-channel front, Gap Inc said that it continues to integrate physical and digital shopping, with the recent expansion of “reserve in store” service to all Athleta stores. [2] For its international business, the company surprisingly reported 6% decline in revenues (excluding Canada) due to flat growth in Asia and 15% decline in Gap revenues in Europe. Gap Inc shied away from commenting on Europe, but it did provide a vague update on its long-term strategy in China. Amid brewing economic troubles in one the most lucrative apparel markets in Asia, the retailer said that it is not planning to change its long term strategies as it still sees significant growth potential.

Overall, Gap Inc’s net sales declined 2.1%, driven by a weakness in comparable sales across the markets. Earnings per share fell to $0.52 from $0.75 in the year ago period due to a 2 percentage point fall in gross margins and 9% increase in operating expenses. [2] The rise in operating expenses reflects $70 million in costs related to the company’s earlier announced strategic initiatives. [3] [1]

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?

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

See our complete analysis for Gap Inc.

Revival Efforts Need Some Time

Gap Inc’s relatively expensive brands — Gap and Banana Republic — have struggled to garner customer attention for some time now, due to the lack of fashion relevant to prevailing consumer tastes. As a result, their comparable sales have been down by mid-high single digits for the past several quarters. Even in the second quarter of 2015, Gap’s comparable sales were down 6% on top of 5% decline in the year ago period.  In turn,  Banana Republic recorded a 4% decline in the metric compared to flat growth last year. [4] However, Art Peck believes that these brands are still strong enough to win customers back, if they are pushed in the right direction. He commented that the merchandising team has made significant progress on different facets of the brands and they are focused on implementing a new operating model to improve demand forecast and speed to market.

Since the promotion of Jeff Kirwan to the position of global president for Gap, the company has built a strong team around him. Stephan Sare, previously the CMO of UNIQLO (Gap Inc’s Japanese counterpart), has joined as the head of global merchandising, and Alessandra Brunialti has returned to the company as the VP of women’s design, following her successful stint with Banana Republic between 1995 and 2011. [5] The two veterans of specialty retailing can leverage their vast experience to guide Gap out of its slump.

Mr. Peck mentioned that Gap would have made significant progress by spring next year, which indicates that the company still needs some time to get designs and styles right. This is true for Banana Republic as well, since years of struggle won’t turn around overnight. Art Peck said that the company will apply enhanced capabilities in fabric sourcing and more efficient vendor addition, in a few places by spring next year. [1] Therefore, we believe that if there’s going to be any improvement in Gap Inc’s performance, it won’t be visible before the 2016 spring collection launch.

View Interactive Institutional Research (Powered by Trefis):

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

Notes:
  1. Gap Inc’s Q2 fiscal 2015 earnings transcript, Aug 20 2015 [] [] []
  2. Gap Inc Reports Second Quarter Results, Gap Inc, Aug 20 2015 [] [] []
  3. Gap Inc Announces Strategic Initiatives, Gap Inc, Jun 15 2015 []
  4. Gap Inc Reports July and Second Quarter Sales Results, Gap Inc, Aug 10 2015 []
  5. Gap boots design, merchandising teams, Retail Dive, Jun 10 2015 []