Gap (NYSE: GPS), a leading global specialty retailer offering clothing, accessories and personal care products, primarily competes with stores like Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF), American Eagle Outfitters, (NYSE:AEO), J.Crew Group (NYSE:JCG) and Urban Outfitters (NASDAQ:URBN).
We estimate that the Gap stores contribute around 28% to the $33.87 Trefis price estimate for Gap’s stock.
We Remain Bullish…
The company is executing on its plan to enter 2 of top 5 apparel markets in the world, Italy and China. Gap has opened a flagship store in Milan (Italy) and will be opening another in Rome. Gap has also opened a flagship store in Shanghai (China) with plans to open a second there as well as two in Beijing.
We anticipate that the opening of new stores in Italy and China, as well as further expansion into emerging markets like Latin America and Asia where demand for branded apparel is growing rapidly, will drive international store sales.
This effect is reflected in our forecasted increases in Gap Store revenue per square foot, for which we project growth from $394 in 2009 to $471 in 2016. We remain bullish on Gap’s long-term outlook and maintain a price estimate for Gap stock at $33.87, well ahead of current market value.
… but is there Downside to our Estimates?
However, there can be a downside to our forecasts if Gap’s international store sales do not increase as anticipated. Despite recent YOY growth in the company’s overall monthly sales, comparable store sales from Gap’s international operations have not shown any particular strength over the last two months – up 1% year-over-year (YOY) in October and down 1% YOY in November.  
Downside to our forecasts could come from increasing competition from other specialty retailers like Abercrombie & Fitch or American Eagle, particularly in emerging markets like Asia. These markets have seen increases in disposable income and consumer expenditures. These trends, along with recession in developed markets (US and Western Europe), has provoked major specialty retailers across the world to fast-forward their expansion plans in Asia.
As we’ve previously discussed (regarding the company’s US operations), it is imperative for Gap to differentiate its business model and/or product offerings to prevent stagnation in revenue per square foot (Trefis: Retail Competition Could Hurt Gap Stock). If the revenue per square foot for Gap stores instead falls to $350, it could create 6-7% downside to our price estimate for Gap’s stock.
Drag the trend-line in the chart above to assess the impact of changes in Gap Store revenue per square foot on Gap’s stock value.Notes: