Gap Inc. Builds Momentum As It Nears The Final Stretch

by Trefis Team
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Gap Inc.
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Gap Inc. (NYSE:GPS) easily beat consensus expectations in its third quarter, posting a fourth consecutive quarter of comparable sales growth and a fifth consecutive quarter of gross margin expansion. This has been made possible through the impressive performance of Old Navy, which goes to show that despite a slowdown in the brick and mortar store sales, companies can still attract customers to their low-priced brands. The highlight of the quarter, however, goes to the company’s eponymous brand, which was able to deliver positive comps for the first time in 15 quarters. The momentum being witnessed through the company prompted GPS to raise its full-year guidance to a range of $2.08 to $2.12, from an earlier expectation of $2.02 to $2.10. It has been estimated that roughly 30% of the annual sales of the largest US retail chains and almost 20% of the US retail industry’s annual sales come from the Christmas holiday shopping season. Hence, the fourth quarter is a crucial one for the company, and it seems to be entering it with strengthened brands and operational discipline in place.

Given the spate of bankruptcies and store closures in the apparel retail industry in the United States, significant market share has been made available as a result. This gives companies like Gap a tremendous opportunity to drive growth, particularly since traffic to its Gap and Old Navy brands has been beating the industry average, with Banana Republic narrowing its spread. Below we’ll highlight some key areas of the business Gap should focus on given the highly important holiday quarter, using our new interactive platform.

We have a $25 price estimate for Gap Inc., which is lower than the current market price.

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. In Gap women’s denim, the company saw 13% comparable sales growth and a 22% gross margin comp. Meanwhile, Old Navy closed out the quarter as the number four denim retailer, which is up two spots from last year.

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, while Athleta’s growth continues to outpace the market. The company has taken a number of initiatives to make the supply chain responsive, and as a result, 50% of the assortment in the business is on a pipeline of 6 to 11 weeks. Given the popularity of the brand, 7 new stores were opened in the quarter, taking the total up to 15 for the year. The company expects the size of the fleet to be about 150 at the end of 2017, with continued growth expected next year.

3. Baby and Kids-Wear

This segment of the company has been a growing segment for a while now, and Gap 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 for any of them in one place. This has also ensured its new brands get the recognition that would not have been possible 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, and feels it is on a path to it being a $3 billion business. Gap has rolled out features like Reserve in Store, Find in Store, Ship from Store, and Order in Store in the past, and added Buy Online, Pick Up in Store in two markets in the quarter.

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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