How Much Will Old Navy Contribute To Gap Inc.’s Top Line Growth In The Next 3 Years?

by Trefis Team
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Gap Inc. (NYSE: GPS) has performed modestly over the past couple of years. The company saw its revenue fall by nearly 4% between 2015-2016, largely due to a 2% decline in comparable sales. The tepid performance was mainly due to a 3% and 7% decline in comparable sales for Gap Stores and Banana Republic Stores respectively. After, a poor 2016, Gap Inc.’s recovery started in Q3 2017, helping the company post a slight improvement in sales (under 1% year-on-year). This recovery was led by better-than-expected comparable sales for Old Navy stores. The Old Navy segment contributes nearly 47% of the company’s overall revenue, and the segment’s revenue grew by nearly 4% annually between 2015 and 2017. Below we take a look at what to expect from Gap Inc.’s Old Navy segment in the next three years.

Based on recent market trends, store optimization strategy, and the activewear potential, we forecast Gap Inc. to report 3-4% annual revenue growth in the next three years, from $15.8 million in FY 2017 to about $17.3 million in FY 2020. We have summarized our expectations on our interactive dashboard, Gap Inc’s Revenue Outlook For the Next 3 Years. If you disagree with our forecasts, you can change the key drivers for the segment to gauge how changes will impact its expected revenue. Below we take a look at the key drivers for this revenue stream.

1. Brand Positioning: This segment generates about 47% of the overall revenue, and has been the fastest growing business of late, with revenues witnessing around 4% annual growth between 2015-2017, reaching just under $7.24 billion in 2017. The brand has consistently delivered comps growth and has increased its market share over recent years. Old Navy is currently the eighth-largest apparel retailer, and the second-largest apparel brand in the United States. The brand’s focus on the value segment has worked in its favor, driving its strong growth in recent years, and should continue to benefit the segment in the medium term.

2. New Store Openings: As a result of the solid performance, Gap has accelerated Old Navy store openings, with over 50 opened in 2018 so far, along with 85 remodels. The brand remains under-penetrated compared to its peers, and we expect the company’s increasing store count should not help improve its market share and revenues.

3. Introduction Of Women’s Plus Size Collection: The women’s plus-size market is well over $20 billion and is growing at a higher rate than the overall apparel market. Old Navy currently falls within the top 10 women’s plus-size brands and is expected to launch its plus collection, previously only available online, in 75 select stores. The expansion of the category in the stores represents a significant growth opportunity.

4. Strength Of The Digital Business: The online and mobile business is an area of focus for retailers 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 more recognition than they would have if they had had a separate web presence. This has helped the company deliver strong growth from its online and mobile channels in recent quarters. The company has also focused its investments into native mobile apps and improving site speeds. These factors should result in strong growth for Old Navy’s digital sales in the next few years.

As a result of the above-mentioned factors, we estimate Old Navy segment revenues to grow just under 6% annually in the next few years, reaching about $17.3 billion in fiscal 2020.

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