Can Old Navy Drive Growth For Gap Inc. In Q4?

by Trefis Team
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Gap Inc. (NYSE: GPS) had a fairly strong first three quarters of 2018, as the company managed to grow its revenue by just under 8% in the first 9 months of the year. This performance was primarily attributable to solid growth both by Old Navy and Athleta brands, as well as improved digital sales and a lower effective tax rate. We expect these trends to continue in the near term, though continued subpar performance from the namesake Gap brand should slightly dampen its Q4 results. Nevertheless, we expect the company to announce another solid quarter when it reports its Q4 results on February 28. Below we take a look at what to expect from GAP for Q4.

We have a $36 price estimate for Gap’s stock, which is slightly higher than the current market price. Our interactive dashboard on what to expect from GAP in Q4 details our expectations for the company’s earnings. You can modify the charts in the dashboard to gauge the impact that changes in key drivers would have on the company’s earnings and valuation, and see all of our Consumer Discretionary company data here.

Factors That May Impact Future Performance

1. Continued Strength of Old Navy: Old Navy accounts for nearly half of Gap’s overall revenues, and has been the second fastest growing segment of late. Over the first three quarters of 2018, the brand has not only consistently delivered comps growth, but also increased its market share. Old Navy’s store traffic has consistently outpaced industry trends, and its online segment saw a meaningful acceleration over the first nine months of 2018. As a result, we expect the holiday season to drive growth for the segment for Q4. 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 54 in the first nine months of 2018. Management believes the brand remains under-penetrated when compared with its peers, and we expect the increasing store count to help improve its market share and revenues.

2. Introduction Of Plus Collection: The women’s plus-size market is estimated at north of $20 billion and is growing at a higher rate than the overall apparel marketOld Navy is expected to launch its online exclusive plus-size collection in 75 select stores. 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 substantial growth opportunity.

3. Athleta: The “Athleisure” segment remains a major growth driver for the apparel industry. Sales in this category continue to grow, and the U.S. market is estimated at around $50 billion currently, with further growth expected. Hence, it is no surprise that Gap’s Athleta brand has been performing well – in fact, it is growing at a much faster rate than the segment overall. The brand has been the fastest-growing segment of late, and we expect the momentum to continue through Q4 2018 and into 2019.

4. Improvement In Online Business: The online and mobile business remains a key growth driver for retailers, and Gap has invested heavily in boosting its digital presence. 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 may 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 revenue stream in the future.

5. Lower Tax Rate: As a result of the lowering of the corporate tax rate, Gap’s effective tax rate is expected to be around 26% for fiscal 2018. This would represent 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 margin and overall earnings.

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