Can Gap Inc. Close Out Its Financial Year On A Strong Note?

by Trefis Team
Gap Inc.
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The apparel retail industry has been plagued with soft mall traffic and reduced consumer spending, which has resulted in a spate of downsizing and bankruptcies. Gap Inc. (NYSE:GPS), being a part of this blighted sector, has been suffering as a result. However, in the first three quarters of the year, the company has been able to beat consensus estimates. 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 its low-priced brands. The highlight of the third quarter, though, went 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 entered it with strengthened brands and operational discipline in place.

We have a $28 price estimate for Gap Inc., which is lower than the current market price. The charts have been made using our new, interactive platform. You can modify the different driver assumptions by clicking here to gauge their impact on the price and EPS estimate for Gap Inc.

Focus On Athleta

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 third 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 this year.

Gap has in the past stated its intention to focus on its growth brands, such as Old Navy and Athleta, while closing down about 10% of its Gap and Banana Republic stores from “lower-productivity” locations. This move follows from the decline in demand for the company’s more established brands, in favor of its younger chains. Gap, in general, has suffered from a decline in store traffic, a factor that has been plaguing many teen apparel companies, which are mostly located in struggling enclosed malls. The company will instead focus on areas where the customers are actually shopping — off-price locations and online.

Departure Of Gap Brand CEO

Gap Inc. announced the departure of Jeff Kirwan, president and CEO of its namesake brand, on February 20. While the company credited Kirwan with improving the responsiveness and brand aesthetics, and making significant progress on its operating model, there were other aspects that were still to be desired. These included not achieving the required level of operational excellence and accelerated profit growth the brand is capable of. Kirwan was appointed to the role in the fourth quarter of 2014, but in the 11 quarters since then, the brand was able to report positive comparable sales growth in just one quarter — the most recent quarter (Q3 2017). This was despite the fact that a number of unprofitable Gap stores were shut down in the interim.

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