Gap Inc Left Reeling And Asking – Et Tu Old Navy?
When Stefan Larsson left Old Navy last year to take over the CEO role at Ralph Lauren, investors were concerned that the brand would lose its style in his absence. However, the impact has been much more severe than anticipated. In the two months Mr. Larsson has not been with Gap Inc (NYSE:GPS), Old Navy’s comparable sales have declined at a high single-digits rate. And this occurred in the holiday season, which was supposed to be an exuberant time for the company. A few months back, the retailer had its revival plan clear: extend Old Navy’s successful merchandising strategies to Banana Republic and Gap while recreating them as fast-fashion brands by bolstering their design and supply chain. Now, Gap Inc appears in a predicament as the glue that was holding its portfolio of chains together has started weaken. Investors are already skeptical about the company, due to its recent disastrous performance and the fact that revival efforts won’t take effect until spring next year, if at all they do. Hence, as much as Gap Inc desperately needs some promising outcomes from its holiday season sales in order to soothe investor concerns, its results have gone the other way, thanks to the Old Navy slip.
Our price estimate for Gap Inc at $35, implies a significant premium to the current market price. However, we are in the process of updating our model in light of the recent lack of growth.
See our complete analysis for Gap Inc.
In its recently reported December results, Gap Inc stated that its net sales for the five week period fell 4% to $2.01 billion due to a 5% decline in comparable sales, which the company cannot attribute to the industry-wide weakness this time around. [1] Its performance was below par due to its premium brands’ shortcomings and a surprising decrease at Old Navy, which has been the retailer’s crown jewel for a long time. At the core of Old Navy’s success has been its merchandising strategies, which had been implemented under the supervision of Stefan Larsson. The brand employs a flexible manufacturing system, wherein certain products are launched in small batches to test demand before beginning mass production. By gauging the response, the management is able to forecast demand properly and release an appropriate production order to vendors and suppliers, who are always kept in the loop to ensure a faster time to market. Suppliers maintain a stockpile of fabric and have the ability to quickly accommodate new trends emerging in the fashion market.
When Stefan Larsson left the brand, it was expected that others would continue to build on his good work, and probably they have. However, the brand’s November and December results suggest otherwise and somewhat showcase why investor concern around his exit was warranted. Things that were working well for the brand should not have fallen apart in a couple of months. Moreover, the absence of management commentary in the sales release only raises concerns that the decline may not be attributable to a tough comparable period alone. There was certainly something about the brand’s holiday collection that did not resonate well with the buyers. Gap Inc would be hoping to bring Old Navy back on track before it goes further south and also banking on its Banana Republic and Gap spring collections to trigger a turnaround in its premium brands. However, we have lowered the revenue per square feet and EBITDA margin forecast for all of Gap Inc’s brands for 2015 and 2016, in light of the recent performance.
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Notes:- Gap Inc Reports December Sales Results, Gap Inc, Jan 7 2016 [↩]