Gap Plans Global Strategy Update to Shore up Slumping Investor Confidence

Gap Inc. (NYSE:GPS) stock has plummeted by more than 10% in recent days, and the company’s management has announced an investor meeting to present its North America business and global growth strategy update on October 10th. ((Gap announce investor meet on October 10th, Source: Gap IR, October 3, 2011)) We believe that the meeting is Gap’s attempt to win investor confidence back, which has fallen considerably in recent weeks. Gap Inc. is a leading global specialty retailer competing with other specialty retailers like Aeropostale (NYSE:ARO), American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NYSE:URBN).

See our complete analysis for Gap

Economic Slowdown in China is Hurting Gap

The recent fall in Gap’s stock has been a direct consequence of the concern growing in market that Chinese economy is slowing down. Until now Gap was giving international expansion as an alternative to offset its falling U.S. sales. China contributes a significant chunk to Gap’s international sales and the company had stated “Expansion Plans in China” as one of its key strategy going forward in last quarter’s earning release. ^[1] But the decision seems to have backfired as Beijing is cutting down on its economic growth to control increasing inflation. ^[2].

With this new uncertainty on Gap’s Chinese business and the U.S. sales already performing badly, investor’s confidence on Gap has taken a hit. The result is evident with a sharp decline in the company’s stock price and the meeting has been called primarily to address the same.

What We Can Expect from This Meeting

Now with Gap’s Chinese expansion plans uncertain, the company just cannot evade by offering international sales as an alternative to domestic sales. As the headline of the investor meeting reads, Gap will have to come out with a special strategy for its ailing North American business. A weak back to school season combined with falling consumer spending capability has also contributed its share in making things worse for the company.

With the sluggishness in economy considered to be a long term effect, the apparel retailers cannot trust on revamp of economy on which they were relying initially. An increase in prices to pass the cost pressure to customers will be too risky in current scenario as it can lead to loss in market share which may further deteriorate the situation. The only option which we think viable is to continue with promotions on its merchandise, however that may lead to decrease in the gross margins.

We believe that the current investor meeting will be aimed at striking a balance in the domestic vs. international focus for the company. We will be keenly observing the investor presentation as it will eventually decide the future course of Gap.

We have a Trefis price estimate of $26.75 for Gap’s stock — a premium of around 60% to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Gap CEO discusses Q2, 2011 results, Source: Seeking Alpha, August 18, 2011 [↩]
2. Chinese economic growth slowing down, Source : Market News International, September 28th, 2011 [↩]