Gap Strategy Update Disappoints, Fails to Explain International Slump

While Gap Inc.’s (NYSE:GPS) stock picked up in the first part of last week owing to Gap’s announced strategy update, it disappointed as the company failed to explain why the international expansion plans stalled due to slowdown in Chinese economy. ^[1] Instead it reiterated past points it has made regarding the company’s international expansion and online business.

Gap is planning to triple its store count in mainland China and inline with this strategy it kicked off its Latin America expansion with its first stores in Chile. However, the company failed to provide any update on the reason why its international comp sales have showed a decline in the last two months, which was promptly reflected in its stock price.

The company looks solid with its target on online sales for 2011 with a target of $1.5 billion in e-commerce revenue by the end of the year. Additionally Gap is looking to improve its margin in the near term by increasing the contribution of online sales to the total sales as online business carry higher margins than retail sales.

Overall, we stand positive on the stock as we believe that Gap will be able to improve its margins going ahead. The company is also striving to make itself leaner with reduced inventories and putting a strong lineup of products to improve its declining U.S. operations.

Our price estimate stands at $26.75, implying a premium of 50% to the current market price.

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1. Gap provides strategy update in annual investor meeting, Source: Gap IR, October 13, 2011 [↩]