Here’s How Gap Is Looking To Get Back On Track

As it struggled to grow revenues and new CEO Arthur Peck worked on a turnaround plan, two years after he took charge, Gap Inc (NYSE:GPS) finally saw an increase in its comparable sales. For Q4 2016, Gap reported a 2% increase in comparable sales and a 1% increase in revenues. This is a fairly positive sign, given that the company’s net sales were down by 2% for the fiscal year 2016. While the company’s CEO admitted that it has been slow in making changes to meet the challenges of the retail market, he believes that Gap has a significant structural advantage. As the market rewards size and scale, the company has a significant opportunity to consolidate and gain market share. While several smaller players are shutting shop in a disruptive retail environment, Gap is working towards improving its product and customer experience to capture this market share. As the company gradually works towards transforming itself (product and service wise) to meet customer preferences, Gap appears to be slowly turning around and is likely to see revenue growth in the future.

See our complete analysis for Gap Inc.

Focus On Nimble Production Process

As it faced intense competition from fast fashion retailers such as H&M and Zara primarily due to its slow supply chain, Gap has worked on making its supply process more nimble to get newer products in the stores, faster. The company is now able to get many of its product categories to the market in 8-10 weeks as opposed to 10 months which is the industry’s historical average. This is a significant change which can drive growth for the company in the long term since it can get fresh inventory in stores more quickly, leading to lower pile ups and discounts. To facilitate this change, the company modified its purchase program and 60% of its fabrics are now committed to in advance, allowing the company to make the production process more efficient. The company has also increased testing of its products both through crowd sourcing and testing in stores which are seasonally ahead to get customer feedback and incorporate it quickly in the product.  Gap is working towards a demand based buying model and integrating its tools to make the production process more efficient and integrated.

Leveraging Retail Network For Better Logistics

As it focuses on omni-channel retailing, Gap has also made significant investments in its logistics infrastructure. The company is working towards using its large retail network as a distribution center for online purchases. This will ensure quicker delivery and reduced investment to add distribution capacity. This would also allow the company to use its existing retail stores more efficiently.

Gap’s size and scale ensured that it weathered the retail storm and could bring changes in its model to adapt to the new retail industry (fast fashion, online channel). The company is now looking to capture the market share created due to several smaller players shutting shop. A higher market share can lead to higher revenues per square foot for the company, leading to an upside in our price estimate.

According to our estimates, the revenue per square foot (including online sales) of Gap’s namesake stores will increase gradually and reach $438 by the end of our forecast period.

If this number increases at a faster pace, there can be an upside to our price estimate.

Gap is working steadily towards initiatives which will make it more nimble and competitive in the current retail environment. The company has an opportunity to increase its market share as it looks to fill the gap created by smaller players who could not survive the disruption in the industry. It appears that the company is reviving itself and the impact of these changes is likely to be visible by the end of 2017.

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