Gap Inc. Rises On Store Rationalization Plans

by Trefis Team
+48.96%
Upside
18.18
Market
27.08
Trefis
GPS
Gap Inc.
Rate   |   votes   |   Share

Gap Inc. (NYSE:GPS) reported its third quarter results on November 20, wherein a 6.5% increase in revenue and a 19% improvement in the EPS was noted, with the metrics reaching $4.09 billion and $0.69 respectively. Strong growth by Old Navy, Banana Republic, and Athleta, as well as digital sales, drove revenue growth. Meanwhile, a lower tax rate and productivity savings resulted in a significant increase in the earnings per share. However, the performance of its namesake brand leaves much to be desired. The Gap brand comp sales came in at -7% vs. +1% last year, Old Navy at +4% vs. +4% last year, and Banana Republic at +2% vs. -1% a year ago. Keeping this in mind, CEO Art Peck laid out the company’s plans to rationalize its stores, concentrating on the “bottom half” of its store portfolio for the Gap brand. The management maintained its full year comps outlook of flat to up slightly, and narrowed its earnings guidance range to $2.55 to $2.60, from $2.55 to $2.70. We expect the company to report an EPS of $2.58 for the year.

We have a $33 price estimate for Gap Inc., which is higher 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 for the interactive dashboard Gap Inc.’s Performance In Q3 and Estimating Its Fair Price to gauge their impact on the revenues, earnings, and price estimate for the company.

Factors That May Impact Future Performance

1. Continued Strength of Old Navy: The brand was able to deliver comps growth of 4% in Q3, despite warmer than anticipated weather. The store traffic at Old Navy continued to outpace industry trends, and its online segment saw a meaningful acceleration in Q3, a positive sign as it heads into the holiday season. The fact that the brand’s merchandise tends to be skewed towards the affordable segment has worked in its favor. Seeing its impressive performance, Gap has accelerated Old Navy store openings, with over 30 opened in FY 2017, and 54 in the first nine months of 2018. The management noted that new store performance is beating expectations and remodels are outperforming the fleet by an average spread of five comp points. The company feels the brand remains under-penetrated when compared with its peers, and hence, plans to double the store openings as compared to FY 2017, which should help to increase the revenues.

2. Introduction Of Plus Collection: The company announced that Old Navy has launched its plus collection, previously only available online, in 75 select stores. The women’s plus-size market is north of $20 billion and is growing at a higher rate than the overall apparel market. According to NPD, even with just the online business, Old Navy falls within the top 10 women’s plus-size brands and the expansion of the category in the stores represents a significant growth opportunity.

3. Popularity Of Athleta: According to the NPD group, the activewear industry is the “primary driver of growth opportunity” for the apparel industry. Sales in this category increased 2%, valuing the market at roughly $48 billion in 2017. Hence, it is no surprise that Gap’s Athleta brand has been performing well, in fact, at a much faster rate than that of the industry. The brand had another strong quarter, and we expect the momentum to continue through Q4 2018. In line with its growth strategy detailed during FY 2017, the company expects store openings to be focused on Athleta and Old Navy, with closures weighted toward Gap and the Banana Republic.

4. Improvement In Online Business: 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 was able to deliver strong growth from its online and mobile channels in the third quarter, and is on track to garner over $3.5 billion in digital sales this year. The company has also focused its investment into the native mobile apps and on improving site speed. These factors should ensure the growth of this segment in the future.

5. Optimizing Store Fleet: Gap Inc. has continued the process of optimizing its store count, including reducing its exposure to low productivity stores. The company has also seen an opportunity for increasing the store count of Athleta, Old Navy, and the factory and outlet expressions at the Banana Republic and Gap. Consequently, in the first nine months, the company opened 109 company-operated stores, largely Old Navy and Athleta, while closing 56 stores, primarily Gap and Banana Republic.

6. Productivity Savings: At the start of 2018, the management set a goal to deliver $200 million in productivity savings, marking a key step in its target to reach a total of $500 million in savings. The company remains on track to exceed that goal, with savings to-date being enabled by strategic sourcing negotiation with vendors to deliver lower non-product costs, optimizing the organizational structure by reducing the non-working marketing dollars focusing on in-store waste and inefficiency, and tightening controls over discretionary spending. These savings will be used to fund the company’s investments into the digital space.

7. Lower Tax Rate: As a result of the lowering of the corporate tax, from 35% to 21%, the effective tax rate for Gap Inc. is expected to be 25% for FY 2018. This is a significant drop from the roughly 40% rate the company has been averaging for the past couple of years. This should help to boost the net income margin, and consequently, the earnings.

8. Rationalizing Gap Brand Stores: The management believes that addressing the bottom half of the fleet, which has been dragging down its performance, represents over $100 million of earnings contribution opportunity. Such stores have been underperforming others in terms of either profitability, customer experience, or traffic trends, and hence, they are being looked into. However, many such stores help to drive traffic on to its websites, and hence, such a step needs to be thoroughly thought out.

See our complete analysis for Gap Inc.

 

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Research

Like our charts? Explore example interactive dashboards and create your own.

 

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!