Gap Inc. (GPS) Last Update 6/27/22
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
65.4%
$7.27
Gap Stores
25.0%
$2.78
Net Debt
14.5% $1.61
TOTAL
100%
$11.12
$9.50
Yours
Trefis Price
N/A
$8.39
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 65% of the Trefis price estimate for Gap Inc.'s stock.
  2. Gap Stores constitute 25% of the Trefis price estimate for Gap Inc.'s stock.
  3. Banana Republic Stores constitute 10% of the Trefis price estimate for Gap Inc.'s stock.

WHAT HAS CHANGED?

  1. Gap Saw Disappointing Q1
Gap's first-quarter result was somewhat of a mess. Revenue fell 13% on a 14% drop in comparable sales. Sales across brands, with the notable exception of Banana Republic, slumped from the prior year. Both in-store and online sales fell double-digit percentages, and margins took huge hits due to freight costs and higher discounts. Its gross margin contracted by 930 basis points while inventory climbed 34%. Moreover, Gap cut its full-year forecasts, expecting revenue to fall in the low- to mid-single-digit percentages and adjusted earnings to be just $0.30 to $0.60 per share. Gap hopes to reset its operational models in order to get into better positions by the second half of the year when critical back-to-school and holiday shopping seasons will play a key role in its overall performance for the year.

Note: Gap's FY'21 ended on January 29, 2022. Q1 FY'22 refers to the quarter that ended on April 30, 2022.

  1. Weak guidance
For the full year, management slashed expectations. Revenue is expected to decline in the low to mid-single-digit range versus last year while non-GAAP EPS is figured to fall in a range of $0.30 to $0.60 against an analyst consensus set at more than twice the upper range of $1.30. The company revised its forecasts on the back of execution challenges at Old Navy, an uncertain macro consumer environment, inflationary cost headwinds, and a slowdown in China.

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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% in 2020. 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 are 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.

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.

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 2021, the company saw net openings of 32 Old Navy stores and 28 Athleta stores and continued to close under-performing Gap and Banana Republic stores in North America.