Gap Inc. Continues Its Momentum In The Second Quarter

by Trefis Team
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Gap Inc.
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Gap Inc. (NYSE:GPS) is among a small group of retail companies that reported a relatively strong second quarter. While the sales and adjusted earnings per share fell when compared to the prior year period, they came in above expectations, led by the company’s value segments. Over 60% of the business comes from the value segment, which includes Old Navy, and the outlet and factory stores.

Gap posted a third consecutive quarter of positive comparable sales of 1%, versus the 2% decline seen last year, and above the flat growth predicted by analysts. By brand, Old Navy was again the shining star, with 5% comps growth, while Gap and Banana Republic posted -1% and -5%, respectively. While the latter two improved sequentially, and the brands continue to remain profitable, there is still work that needs to be done to turn them around. Below we’ll highlight some positives in the quarter, and the businesses that the company should focus on.

1. Denim

Stretch denim is the latest trend in men’s and women’s fashion. Sometimes the problem with this fabric is that while it stretches well, it does not stretch back. Hence, the company worked with vendors to develop several fabrics, across different price points, that offer the stretch, together with excellent compression and recovery. This has met an ailing need in the market, which has ensured good sales, and has consequently driven scale for the company. Gap closed out the second quarter with an almost 8% market share in denim, which reflects a 40 basis points increase in the past six months.

2. Activewear

The US activewear market is a $40 billion behemoth, with an 8% average annual growth rate, representing one of the highest growth areas in the apparel market. Gap’s Athleta brand is solely focused on this space, and the company provides athletic wear in its other segments as well. For the company as a whole, this segment contributes over $1 billion in revenues, and at the end of the quarter, the company had garnered 3.5% share in this growing market, a 20 basis points improvement. Again, the popularity of the company’s products will result in scale, and consequently improved margins.

3. Baby and Kids-Wear

This segment of the company has been a growing segment for a while now, and the company has been rewarded with an almost 10% market share. This market in the US has been valued at $30 billion, and the company sees tremendous value and opportunity to drive loyalty with parents. The most significant progress in this field has been made by Old Navy, which has managed to capture 6% of the market on its own. While progress has also been made by its namesake brand, there is significant room to grow.

4. E-Commerce

The online and mobile business is the place to be these days, and Gap has ensured its presence is felt in the space. The company has one platform for all of its brands, ensuring customers can purchase items from any of them in one place. This has also ensured its new brands get the recognition that would not have been possible otherwise, if they had had a separate web presence. An upshot of this is that the company expects double-digit growth from its online channel this financial year. Gap has also rolled out features like Reserve in Store, Find in Store, Ship from Store, and Order in Store, and will be testing out Buy Online, Pick Up in Store in the third quarter.

While the broad retail sector has been struggling, the earnings of Gap should provide some cheer to the market. A beat on weak expectations may not be much, but the improved performance resulted in the company revising its earnings guidance upwards, which is definitely a positive step. The reported EPS guidance has been improved to a range of $2.12 to $2.20 for FY 2017, while the adjusted EPS guidance has been upped to $2.02 to $2.10, from a previous guidance of $1.95 to $2.05. Although much work has to be done by Gap, the company seems to be on the right track.

See our complete analysis for Gap Inc.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Gap Inc.
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