Gap Store Closings Reveal Weakness in Core U.S. Market

Earlier this month, Gap Inc. (NYSE: GPS) announced that it would be closing 189, or 21%, of its namesake Gap stores by the end of 2013. Gap, which also owns premium brand Banana Republic and discount brand Old Navy, has been struggling for years as customers turned from their basic offerings to trendier rivals such as Abercrombie & Fitch (NYSE: ANF). Gap North America President Art Peck admitted, “it’s been us who’ve kind of wandered” ^[1] and indicated a new focus on “putting product in the store that is brand-right and meets what our customers expect”. ^[2]

See complete analysis of Gap’s stock here

Store reduction could lead to improved revenue per square foot

By reducing overall square footage and focusing on delivering solid products, Gap hopes to slow an overall trend of steep discounts and continual sales that have resulted in an annual revenue drop for its namesake brand over the past six years ^[3]. According to Trefis estimates, the namesake Gap stores account for less than 30% of Gap’s stock price and an increase in revenue per square foot could have a solid impact on the stock going forward.

China driving international expansion

Gap is planning to counter the closing of its US stores by tripling the number of stores in China from 15 to 45. International and e-commerce sales have been the primary growth vehicles recently, especially as the core US market continues to struggle against an economic downturn. The Gap flagship store in Hong Kong is expected to open in the next couple of weeks, Banana Republic will be opening its first store in Paris later this year, and Old Navy has plans for expanding into Japan. ^[4] Diversifying the customer base globally is a smart move that will allow Gap to weather future economic changes with a minimal disruption of profit.

The Trefis price estimate for Gap’s stock is about $27, a 40% premium over the current market price.

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1. Gap Closing Stores, eBay Growing, Performance Marketing Insider, Oct 2011 [↩]
2. Gap to close 200 U.S. stores as it expands in foreign markets, Los Angeles Times, Oct 2011 [↩]
3. Gap Closing Stores in US, Boston Globe, Oct 2011 [↩]
4. Gap to Close a Fifth of All Namesake Stores in United States, Huffington Post, Oct 2011 [↩]