Gap Inc’s Results Will Reflect Its Resilience

by Trefis Team
Gap Inc.
Rate   |   votes   |   Share

Gap Inc. (NYSE:GPS) is one of the few apparel retailers in the U.S. which has performed well even in unfavorable market conditions. Backed by its strong market position, growing e-commerce channel and fashion blog marketing, the company registered sturdy growth during the weak holiday season and cold affected first quarter. Its momentum continued in the second quarter as well when most apparel retailers were struggling to match their previous year’s performance.

Gap Inc. will report comparable store sales growth of 5% when it releases its Q2 fiscal 2013 earnings on August 22. The figure is significantly higher than that for its peers and reflects its strong product offerings, firm inventory control and growth in its online sales. [1] This growth comes despite a slowdown in the company’s business in July due to heavy promotions and the weakness in the U.S. apparel industry.

See our complete analysis for Gap Inc.

Apparel Industry Remained Weak During The Quarter

The spring season in the U.S. this year was reportedly the coldest since 1996, with average temperatures around 50.5 degree Fahrenheit. Moreover, the season turned out quite wet with average precipitation 0.21 inch above the 20th century average. [2] These weather conditions translated into low demand for clothing suiting warmer and drier climate, which impacted the industry wide apparel sales during March-May. Moreover, the consumer spending remained weak during the quarter due to high unemployment rate as U.S. employers slowed their hiring pace outside the farming sector. [3] The worst affected was the teenage segment, where the unemployment rate rose to 23.7% in July. [4]

As a result, the beginning of the back-to-school season (July), which is the second most important season for apparel retailers, was quite weak. According to the National Retail Federation, average spending per family on apparel, shoes, supplies and electronics will decline by almost 8% during this season, as compared to 2012. [5] This can be attributed to last year’s record back-to-school season spending and cautious consumer spending this year on the account of payroll tax increase. Overall, the rough quarter impacted the sales of a number of retailers, including Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO).

However, Gap Inc. Showed Resilience With Strong Product Offerings

Gap Inc. has been on the top of its game in managing its inventory since it started losing touch with emerging fashion trends towards the end of last decade. The company has managed to keep its products in line with the prevailing trends. During the second quarter, Gap Inc’s core products such as denims and woven tops along with its seasonal offerings such as summer dresses and shorts, delivered good performance. [6] [7] For Banana Republic, categories such as suitings, pants, woven tops were among the strongest growth drivers. However, the weakness in women’s merchandise and knit tops dragged the brand’s growth lower. [6] [7] The company’s youngest brand, Old Navy, was the strongest during the quarter with healthy growth coming from kids & baby products, summer collections, flip-flops, active shorts and dresses. [6] [7]

As a result, the company registered comparable store sales growth of 7% during May and June. [8] However, the figure fell to 1% during July as the start of back-to-school season was marked by industry wide promotional activities. [3] This can also be attributed to the company preparing itself for low inventory carryover for the third quarter.

The launch of new products and campaigns also assisted Gap Inc’s growth during the second quarter. In July, Old Navy launched a vintage tee collection under the tag “Mickey Through The Decades” featuring Disney’s most iconic character – Mickey Mouse. The collection included t-shirts for all age groups depicting Mickey Mouse’s evolution over the years. [9] The appealing product combined with attractive pricing supported the brand’s growth to some extent. Moreover, Banana Republic was selected as formal attire supplier for ORACLE TEAM USA, the sailboat racing syndicate and current defenders of the 34’th America’s cup. [10] We believe that this partnership had a slightly positive impact on the brand’s results.

Growth In E-Commerce Will Help

Online shopping in the U.S. has been growing rapidly and Gap Inc. has been at its forefront. The company’s direct-to-consumer (mainly includes e-commerce channel) revenues have jumped by almost 60% the last two years, which is impressive given the size of its online business. [11] Even during the first quarter when the apparel market slipped, Gap Inc’s online sales grew by a staggering 27%. Apart from the growth in the online apparel industry, the retailer’s mobile apps and mobile-optimized websites have played a vital role in strengthening its direct-to-consumer business. Additionally, its ship-from-stores services, which allows the fulfilling of online orders through store inventories, have enabled it to offer a greater variety over the Internet, maintain delivery responsiveness and drive store traffic. [12] Gap Inc is concerned that it might lose customers if they do not find products, fits and colors according to their likings over the Internet, and assume that even stores will not have these products. [12] Since the retailer’s merchandise offerings remained strong during the second quarter, we expect the strong growth in e-commerce channel to continue.

The direct-to-consumer channel accounts for about 25% of the company’s value according to our estimates.

Our price estimate for Gap Inc. at $47, implies a premium of about 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. Gap Inc. Reports Second Quarter And July Sales, Gap Inc., Aug 8 2013 []
  2. Spring 2013 Recap: Cool temperatures dominate the U.S.,, Jun 12 2013 []
  3. Retailers boost July sales with heavy discounts, promotions, Reuters, Aug 8 2013 [] []
  4. Teen Retailers Could Be In for Rough Back-To-School Season, The Wall Street Journal, Aug 6 2013 []
  5. On heels of historically high back-to-school season, 2013 spending expectations decline, National Retail Federation, Jul 18 2013 []
  6. Gap Inc.’s May earnings transcript, Jun 6 2013 [] [] []
  7. Gap Inc.’s June earnings transcript, Jul 11 2013 [] [] []
  8. Gap Inc. Reports May Sales, Gap Inc., Jun 6 2013 []
  9. Old Navy Launches “Mickey Through The Decades” Vintage Tee Collection, Gap Inc., Jul 8 2013 []
  10. Banana Republic Chosen As Formal Attire Supplier Of ORACLE TEAM USA, Defenders Of The 34’th America’s Cup, Gap Inc., Jul 9 2013 []
  11. Gap Inc.’s SEC filings []
  12. Gap’s Q1 fiscal 2013 earnings transcript, May 23 2013 [] []
Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!