The Gap Inc. (NYSE:GPS) recently announced its strategy going forward at its annual investor meeting. [1] The major highlight of the meeting was Gap’s focus on international and online growth as its key strategy in the near term. However the company failed to give any update on the recent blips in its international comp sales for August & September, which many analysts (us included) had hoped to see. (See our recent note: Gap’s Sudden Drop in International Sales Warrants Investor Meeting Explanation.) This resulted in shares slumping after the meeting. [2]. 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).
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China is Central to Gap’s International Expansion Plans
Gap reiterated China as the key market to its international expansion strategy. The company plans to nearly triple the number of Gap stores in greater China from roughly 15 at the end of this year to about 45 by the end of 2012. It also expects to double its franchise stores to about 400, by the end of fiscal 2014. Apart from Greater China, it plans to open the first Gap flagship store in Hong Kong in a few weeks as well as a Banana Republic flagship store in Paris later this year.
We believe that the strategy update has been more on the disappointing side as Gap just restated the statements which it has been saying since the end of last quarter. The meeting failed to give any update on impact of Chinese economy slowing down and any strategy which the company may have to counter it. There was also disappointment in the market on account of Gap not clearing the air that why its international comp sales have been declining since last two months, despite Gap projecting international expansion as its answer to falling domestic sales.
Although the online sales target looks promising
On a brighter side though, Gap expects e-commerce business to hit $1.5 billion in revenue by the end of 2011. The company stated that its online sales are on track to reach $2 billion in revenue and operating income of $500 million by the end of fiscal 2014.
According to Trefis estimates, Internet Orders & Franchise Business contributes nearly 25% to Gap’s stock price, and we expect this figure to increase if the company is able to achieve its stated online sales target. Additionally the increased contribution from online sales will also help the company to improve its overall margins, since online business carry higher margins than retail sales.
We have a Trefis price estimate of $26.75 for Gap’s stock — a premium of around 50% to the current market price.
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Notes:- Gap provides strategy update in annual investor meeting, Source: Gap IR, October 13, 2011 [↩]
- Gap Inc.’s October 13th stock movement, Source: Google Finance [↩]
