Two Factors That Support Our Bullish Outlook For Gap Inc

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Gap Inc‘s (NYSE:GPS) stock has fallen by almost 30% over the past six months due both to the consistently weak performance of its mainline brands (Gap and Banana Republic) and to broad investor pessimism centered on the rapid growth of fast fashion brands. While the company is having some trouble in rejuvenating its main brands’ momentum, there are a couple of factors that hold tremendous long term growth potential and support our optimistic outlook. Our price estimate for Gap Inc is at $43, implying a premium of about 40% to the current market price. In addition to the consistent growth of Old Navy and the scope for international expansion, rapid growth of the omni-channel platform and the expansion of smaller brands in the U.S. are key for boosting the retailer’s value, going forward.

Similar to other participants in the industry, Gap Inc adopted omni-channel retailing a while back, but it has been moving much faster than its peers. With effective implementation and large-scale deployment of omni-channel strategies, the retailer will be able to improve its store traffic and trigger an increase in customer spending. A couple of years back, Gap Inc announced that its smaller brands — Athleta, Intermix, GapKids and babyGap — will play a crucial role in its quest to gain share in the U.S. apparel market. These concepts have expanded at a decent pace so far and they still have several growth opportunities at hand.

See our complete analysis for Gap Inc.

Omni-Channel Retailing

The need for omni-channel retailing has arisen from the fact that buyers across the industry are aggressively switching to online shopping, and yet they are not satisfied. According to research by Dyn, an Internet performance company, slow-loading webpages, intricate check-out systems and hassles of mobile shopping, prompt almost 30% of customers to abandon shopping mid-way. [1] Thus, by providing an omni-channel environment with ample convenience and incentives, companies can retain those customers. Omni-channel shoppers exhibit a tendency to shop more frequently and spend almost 3.5 times more than regular shoppers. The in-store conversion rate amid multichannel options is four times higher than online-only conversion rates. If in-store pick up option is available for online orders, retailers can generate 7% higher net sales. [2]

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Gap Inc has proactively deployed several omni-channel initiatives and has even seen some success. A while back, the retailer launched its ship-from-store service, which allows the fulfillment of online orders through store inventories. This service not only enables the company to offer a greater variety of merchandise over the Internet, but also helps it improve delivery responsiveness and store traffic. A couple of years back, Gap Inc launched “find in store” and “reserve in store” services to enhance its customer service and integrate the digital and store channel. The “find in store” function informs the customers where to find the nearest stores and the “reserve in store” service allows them to reserve up to five items online to try in stores. Since buying clothes is a personal experience and online shopping provides convenience, this offers customers the best of both channels. Encouraged by the positive response, the company expanded its “reserve in store” option to all Gap Stores in the U.S. in 2014. In addition, it will begin testing a new order in store capability later in the year, which gives customers instant access to expanded merchandise offerings over the Internet. With continued progress on this front, Gap Inc will be able to realize better comparable sales growth in the future, which will complement the revival efforts for its mainline brands.

Growth Of Smaller Brands

Gap Inc elevated its focus on smaller brands in 2012 after realizing that they hold immense potential for long term growth. The company began the physical store expansion of Athleta, previously online exclusive sportswear brand, in 2012 and had 101 stores operational at the end of 2014, with another 20 planned for 2015. With its main competitor, Lululemon, still trying to tackle with bad publicity, Athleta can grow strongly for several years to come. Back in 2013, Gap Inc, acquired Intermix to extend its reach in the luxury segment. Intermix is a women’s fashion boutique which has partnerships with several designers across the country. [3] At the time, it had 30 stores in the U.S. and generated only around $130 million in annual revenues. [4] By the end of 2014, the count was up to 42 along with the online expansion of the brand. Though revenue contribution is small, rapid growth through store and web expansion will help Gap Inc gain share in the market to an extent.

Gap Inc’s management has stated in the past that the market shares of GapKids and babyGap in their respective segments are significantly higher than the retailer’s market share in adult apparel. It also stated that there is a huge demand for Gap’s baby products in its own stores as well as franchisee stores. [5] This presents a good opportunity for the retailer to leverage these brands and fuel its long-term growth. In 2012, GapKids launched its first limited edition collection in partnership with designer Diane Von Furstenberg, which was very well-received. [6] Its second such collection launched in 2013 also did very well and the brand has performed healthily since. It operates in a segment where competition isn’t as intense as the teen apparel market. American Eagle Outfitters (NYSE:AEO) has discontinued its 77kids brand and Aeropostale (NYSE:ARO) appears to have run out of money to expand its P.S. from Aeropostale brand. Therefore, GapKids appears well poised for long term growth.

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Notes:
  1. Dyn: Two thirds of shoppers unhappy with online experience, BizReport, Feb 17 2015 []
  2. Get Ready for More Omni-Channel Retailing, Colliers, Mar 10 2015 []
  3. Gap Inc. Acquires Intermix, Gap Inc., Jan 3 2013 []
  4. Gap to Buy Luxury Retailer Intermix, Wall Street Journal, Jan 2 2013 []
  5. The Gap’s CEO Hosts 2013 Investor Meeting, April 17 2013 []
  6. Gap And Don von Furstenberg To Launch Second Kids & Baby Collection, The Wall Street Journal, Jan 30 2013 []