Gap Inc (NYSE:GPS) is scheduled to release its Q4 fiscal 2012 earnings on February 28, but it has already reported its sales figures in a recent press release.  In the first nine months of fiscal 2012, the retailer witnessed 6.5% and 5% growth in revenues and comparable store sales, respectively. Due to a weak comparable period (Q4 fiscal 2011) and an additional week in fiscal 2012, Gap is expected to see revenue growth of 11% for Q4 fiscal 2012. Gap’s strong performance in the U.S. is attributable to booming online sales and an impressive performance during a slow holiday season. 
On the flip side, the international results have remained sluggish primarily due to the tough economic environment in Europe. The retailer recently launched its e-commerce channel in Japan, which favors Gap’s long-term outlook but was not enough to generate positive comparable store sales growth in the fourth quarter. Additionally, we’ll watch out for updates on Gap’s international expansion and global brand management strategy.
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Online Segment Will Help The U.S. Results
Currently, the apparel industry in the U.S. is being driven by growth in the direct-to-consumer channel. This is evident from the fact that key players such as Abercrombie & Fitch (NYSE:ANF), Urban Outfitters (NASDAQ:URBN) and American Eagle Outfitters (NYSE:AEO) have reported substantial growth in their direct-to-consumer businesses in their recent results. Moreover, Gap’s own direct-to-consumer revenues increased by an annual average of 17% during 2007-2011 and further grew by 23% in Q3 fiscal 2012.  This implies that Gap has benefited from the ongoing direct-to-consumer shift in the apparel industry.
We believe that this segment played an important part in Gap’s reported 11% revenue growth in Q4 fiscal 2012. Moreover, it also helped the retailer achieve comparable store sales growth across its brands: Gap North America (4%), Banana Republic (3%) and Old Navy (8%).  This is the second quarter of healthy comparable store sales growth for Old Navy driven by more unit inventory at its stores.
With the increasing popularity of online shopping and the recent launch of Gap’s e-commerce channel in Japan, we expect this segment to be a notable driver for the future.
The Internet and franchise business contributes about 25% to Gap’s value, according to our estimates.
Strong Holiday Results Also Helped
The U.S. witnessed its worst holiday season in 2012 since the financial crisis of 2008 due to lower than expected consumer spending, Superstorm Sandy and fiscal cliff concerns.  Amid all of this, Gap emerged as one of the few retailers and performed well during the holiday season. Moreover, Gap was able to perform better than it did during last year’s holiday season driven by a good response to its bright holiday sweaters and promotional activities.  For November and December 2012, Gap’s overall revenues (which included weak international results with comparable sales growth of -1.5%) increased by 5%.  
Weakness In Europe And Japan Will Weigh On International Results
Gap’s results from its international business have been weak for the past couple of years. At the end of Q3 fiscal 2012, the year-to-date international comparable store sales decreased by 4%, following a 7% decline in the same period last year. The figure remained depressed at -2% in the fourth quarter as well, which was attributable to a weak European economy. Apparel retailers such as Abercrombie & Fitch, Guess? (NYSE:GES) and Nike (NYSE:NKE) have also had troubles in sustaining their growth in Europe. The region contributes a little less than 30% to Gap’s international revenues.
Currently, the Japanese market is weak as it is still recovering from 2011’s natural disaster. This weighed on Gap’s international results in Q4 fiscal 2012. However, Japan can be a lucrative market for the U.S. apparel retailers as indicated by the encouraging response received by Urban Outfitters on launch of its Free People brand. Gap’s growth in the region will be complemented by launch of its own e-commerce channel. Along with various brands such as Gap, GapKids, BabyGap and Banana Republic, the retailer will also provide additional benefits such as as free shipping for purchases above 6,000 yen, free in-store returns within 30 days, and the details of design and fabric of its apparel online.
The international segment accounts for about 25% of Gap’s annual revenues.
Updates On International Expansion And Brand Focused Management
Last year Gap opened its first outlet store in China, which were quite successful according to the retailer. In the current scenario, China provides a huge potential for apparel retailers as evident from Coach’s (NYSE:COH) substantial growth in this region. Moreover, the lack of direct competition from players such as Aeropostale (NYSE:ARO) and American Eagle Outfitters will work in Gap’s favor. It will be interesting to see how Gap plans out its expansion in the region. Additionally, Gap recently announced that it will open its first stores in Brazil in 2013. We will closely monitor any updates on this front.
Beginning fiscal 2013, Gap will implement its global brand management structure aimed to fuel the company’s long-term growth. Under this structure, Gap will bring together its North American, international, online, outlet and franchise divisions under a single global executive for each of its Gap, Banana Republic and Old Navy brands. 
Our price estimate for Gap Inc. at $39, implying a premium of about 20% to the market price.Notes:
- Gap Inc. Reports January Sales and Strong Fourth Quarter Results, Gap Inc., Feb 7 2013 [↩] [↩]
- U.S. retailers scramble after lackluster holiday sales, Reuters, Dec 26 2012 [↩] [↩]
- Gap’s SEC filings [↩]
- Gap Inc. Reports December Sales, Gap Inc., Jan 3 2013 [↩] [↩]
- Gap Inc. Reports November Sales, Gap Inc., Nov 29 2012 [↩]
- Company press release [↩]