Gap’s Int’l Expansion Efforts Show Promise

September 27th, 2011 by Trefis Team
-1.90%
Downside
21.59
Market
21.18
Trefis
GPS: Gap logo
GPS
Gap
Gap

Source : Gap Inc.

Continuing with its strategy of international expansion, Gap Inc. (NYSE:GPS) has opened a Banana Republic store in Russia earlier this month. [1] The store located in Moscow’s AfiMall City is the company’s first “affordable luxury” store in Russia, a country where consumer base has nearly double the amount of disposable income compared with the average western consumer. Gap competes with other specialty retailers like Aeropostale (NYSE:ARO), American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NYSE:URBN).

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We have a Trefis price estimate of $26.75 for Gap’s stock — a premium of around 60% to the current market price. The large upside between Trefis price estimate and current market price is predicated on our assumption that profit margins will recover in the medium term and the sales will grow as the company expands its global portfolio.

A move to offset its falling sales in US:

Gap has embarked on a large scale international expansion plan in a bid to boost growth despite its declining sales in the U.S. market. As the demand for retail consumption is growing quickly in Russia, the move to introduce Banana Republic is a smart decision by Gap’s management. Another significant item to note is that the store is based on a franchise model, which will keep a check on the cost side. Controlling expenses also remains a top priority with the company struggling with declining margins.

The affordable luxury store will help Gap to improve its margins:

In the recent two quarters Gap has been plagued with the shrinking margins. Banana Republic is the most high-end brand for the company under the affordable luxury.

Banana Republic has an EBITDA margin of nearly 18% which is considerably higher than that of Gap and Old Navy, two of the most well known brands. We believe that Banana Republic will be the key brand for Gap to fight the margin woes because luxury brands can pass the cost pressures to customers more easily compared to value-based brands. As the contribution from Banana Republic to the net sales increases, we expect the margins to improve over the next quarter.

See our complete analysis for Gap

Notes:
  1. Gap opens first Banana Republic store in Russia, Source: Gap Inc. IR, September 8, 2011 [↩]