Gap Inc. (GPS) Last Update 5/21/21
Related: AEO ANF TPR NKE
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
Gap Inc.
STOCK PRICE
DIVISION
% of STOCK PRICE
Old Navy Stores
48.3%
$16.02
Gap Stores
43.0%
$14.25
Net Debt
1.8% $0.61
TOTAL
100%
$33.15
$32.54
Yours
Trefis Price
N/A
$31.81
Market
 
Top Drivers for Period
Key Drivers
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TREFIS Analysis


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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

Gap Inc. Company

VALUATION HIGHLIGHTS

  1. Old Navy Stores constitute 48% of the Trefis price estimate for Gap Inc.'s stock.
  2. Gap Stores constitute 43% of the Trefis price estimate for Gap Inc.'s stock.

WHAT HAS CHANGED?

  1. Q3 Earnings Falls Short of Estimates
Gap’s fiscal third-quarter earnings of 25 cents per share fell short of earnings of 32 cents per share estimates (also declined 32% year-over-year), despite sales gains at Old Navy and Athleta. Gap’s same-store sales during Q3 grew by 5%, with Athleta reporting a record quarterly increase. That came in far better than the 0.3% decline that analysts were expecting. The company's digital sales surged 61% and accounted for 40% of total sales during the quarter.

  1. Gap and Banana Republic Divisions Continue To Weigh on the Company
At Gap’s namesake banner, net sales fell 14%, and same-store sales dropped 5%. The company attributed the declines, in part, to store closures that took place during the quarter. Gap has previously said it expects to close roughly 30% of its Gap and Banana Republic stores in North America by the end of fiscal 2023.

At the Banana Republic, a brand known for its work apparel, net sales fell 34%, and same-store sales dropped 30%. Gap named Sandra Stangl as the new president and CEO of the Banana Republic as part of its bid to revive the brand. The team has been heads down, focused on changing the Banana Republic assortment to be more loungewear, more activewear, and more comfortable clothing.

  1. Strength of Old Navy
Within Old Navy, net sales increased 15% in Q3, and same-store sales were up 17%. The company said it offered 55% more activewear under the Old Navy brand during the quarter, to meet the needs of customers looking for comfortable clothing as they spend more time at home. The company feels the brand remains under-penetrated when compared with its peers, and hence, plans to increase further its store count in the coming years, which should help to increase the revenues.

  1. Popularity Of Athleta
Gap’s brand for women’s workout clothes, net sales were up 35% in Q3, as same-store sales surged 37%, the highest ever recorded in the brand’s history. The company cited its mask business, sparked by the pandemic, as a contributing factor to attracting new customers to Athleta.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

  1. Old Navy Stores EBITDA Margin
Old Navy Stores EBITDA Margin: EBITDA margins Old Navy Stores declined from 18.4% in 2010 to 14.4% in 2011 due to a sudden rise in cotton costs owing to floods in major cotton-producing areas, and excessive promotional activities in domestic operations. The margins rebounded to 16.7% in 2012 with lower cotton prices and better product mix. This improvement continued in 2013 as margins increased slightly to 17.3% with better expense leverage. In 2014, weighed down by heavy promotions, Old Navy Stores EBITDA Margin declined to 16.7% and they further shrunk to 13.9% in 2015. The declining trend continued in 2016 when the metric fell to 12%. This trend reversed in 2017, as a result of higher sales of full-priced items, and increased digital sales, with the metric reaching 13.4%. This figure declined to 12.2% in 2018 before plunging to 7.3% in 2019 as a result of an increase in operating expenses led by separation-related costs and global flagship impairment charges. Going forward, we expect Old Navy's margins to continue to show an improvement, albeit slowly, as a result of greater full-price sales, and an improvement in online revenues

  1. Gap Store & Internet Revenue per Square Foot
Gap Store & Internet Revenue per Square Foot: Gap store revenue per square feet increased consistently from $412 in 2009 to $484 in 2013 driven by the consolidation of under-performing stores, online revenue growth, and strong customer response to the brand's products. However, the figure declined to $466 in 2014, $455 in 2015, and $448 in 2016 as buyers across the industry scaled back their spending on premium basic products and spent on fast fashion brands instead. Improved retail conditions in the second half of 2017, as well as the growth of smaller brands - Athleta, Intermix, GapKids, and babyGap, rise in online revenues, development of the omnichannel platform, and store consolidation, resulting in an improvement in the metric in 2017 to $465 and further to $477 in 2019. We project the figure to reach $520 by the end of our forecast period.

BUSINESS SUMMARY

Gap is a global specialty retailer offering clothing, accessories, and personal care products for men, women, and children. It markets its products under the Gap, Old Navy, Banana Republic, Athleta, GapKids, babyGap, and Intermix brands.

Gap operates stores in North America and several countries in Europe and Asia. It is one of the few U.S. apparel retailers who have a decent international presence. The company also sells its products online through web-based stores for each of its brands. The company has recently changed its reporting structure due to its adoption of omnichannel retailing. It no longer reports separate e-commerce revenues but includes them in individual brands' revenues. In addition to this, Gap has franchise agreements with unaffiliated franchisees to operate Gap, Old Navy, and Banana Republic stores in many countries.

The retailer operates three different brands for three main demographics: Old Navy for cost and fashion-conscious teenagers, Gap for young adults, and Banana Republic for more affluent and relatively older customers.

KEY TRENDS

Development of omni-channel platform

An omnichannel platform enables retailers to engage customers irrespective of the shopping channel they prefer. A while back, Gap Inc. launched its ship-from-store service, which allows the fulfillment of online orders through store inventories. This service not only enables the company to offer a greater variety of merchandise over the Internet but also helps it improve delivery responsiveness and store traffic. A couple of years back, Gap Inc. launched “find in store” and “reserve in store” services to enhance its customer service and integrate the digital and store channel. The “find in store” function informs the customers where to find the nearest stores and the “reserve in store” service allows them to reserve up to five items online to try in stores. Since buying clothes is a personal experience and online shopping provides convenience, this offers customers the best of both channels. Encouraged by the pleasing response, the company expanded its “reserve in store” to all Gap Stores in the U.S. in 2014. In addition, it began testing a new order in-store capability later in the year, which gives customers instant access to expanded merchandise offerings over the Internet.

Online retail sales in the U.S. have grown at a rapid pace over the past several years, thanks to growing internet usage in the country. Internet penetration in the U.S. has gone up from 44% in 2000 to 89% currently. Furthermore, facilitated by the convenience of constant access, 92% of teens today go online daily, including 24% who are online constantly, according to a study conducted by Pew Research Center. Over half of the teens (aged 13 to 17 years) go online several times a day, aided by the presence of smartphones, which is available to nearly three-quarters of teens. Smartphone usage will only increase in the future, and this will likely result in a steady rise in online sales. This is evidenced by research that predicts online apparel sales in the US to increase its revenue from $63 billion in 2015 to $195 billion by 2024 .

Efforts to gain market share in the U.S.

While Gap Inc. is consolidating its main brand networks in North America, it is looking at other ways to gain share in the U.S. apparel market. The retailer is relying on smaller brands for this purpose, such as Athleta, Intermix, GapKids, and babyGap, to grow its business in North America. Through Athleta, Gap Inc. offers performance-driven sports apparel and footwear for women. In line with its growth strategy detailed during FY 2019, the company expects store openings to be focused on Athleta and Old Navy, with closures weighted toward Gap and the Banana Republic.

Gap's targeted international expansion

International expansion is one of the key long-term strategies of Gap. The company is particularly focused on emerging economies such as China, which has become the second-largest apparel market in the world with a booming middle class, rising disposable income, and growing urbanization. The company opened 38 Gap stores in Asia in 2014, 39 in 2015, 27 in 2016, 52 in 2017, 34 in 2018, and added another 26 in 2019 with most located in China.

Optimizing Store Fleet

Gap Inc. has continued the process of optimizing its store count, including reducing its exposure to low productivity stores. The company has also seen an opportunity for increasing the store count of Athleta, Old Navy, and the factory and outlet expressions at the Banana Republic and Gap. Consequently, in FY 2019, the company opened 189 company-operated stores, largely Old Navy and Athleta, while closing 177 stores, primarily Gap and Banana Republic.