Soft Performance By Gap Global Likely To Weigh On Gap’s Q1 Results

by Trefis Team
Gap Inc.
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Gap Inc (NYSE: GPS) is set to announce its first quarter results later today, followed by a conference call with analysts. The clothing retailer is expected to post quarterly earnings of $0.31 per share, indicating a year-over-year decline of 13.1% while revenues are expected to come in around $3.75 billion, implying a marginal decline. Persistent softness at Gap Global, coupled with foreign currency headwinds are likely to weigh on the company’s Q1 numbers. Nevertheless, Gap’s focus on enhancing its omni-channel capabilities and strong momentum at its Old Navy brand will aid the company’s performance in the fiscal first quarter.

We have summarized our key expectations from the earnings announcement in our interactive dashboard – How Is Gap Inc Likely To Have Fared In Fiscal In Q1?  You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see more Trefis Textiles, Apparel and Luxury Good Industry Data here.

A Quick Look at Gap Inc’s Revenue Sources

Gap Inc reported $16.6 billion in Total Revenues in 2018. This included the following revenue streams:

  • Gap Global: $5.1 billion in FY 2018 (31% of Total Revenues). Gap global is one of the oldest apparels and accessories brands and its assortment includes denim, tees, button-downs, and khakis.
  • Old Navy: $7.8 billion in FY 2018 (47% of Total Revenues). Old Navy is a global apparel and accessories brand that makes affordable and high-quality products for all age groups.
  • Banana Republic: $2.5 billion in FY 2018 (15% of Total Revenues). Banana Republic is a global apparel and accessories brand that provides a wide range of products including clothing, eye-wear, jewelry, shoes, handbags, and fragrances.
  • Other: $1.1 billion in FY 2018 (7% of Total Revenues). This segment primarily consists of net sales for the Athleta, Intermix the Hill City brands.

Key Factors To Watch for In Q1:

Gap Global Struggles Likely To Continue

  • Gap Global has struggled over the last five years, and has delivered negative comp growth over this period – a trend that is likely to continue in Q1. The brand’s comp sales fell 5% in 2018 – worse than the 1% reduction in 2017 – even as total revenues for the brand remained largely flat. Weakness across the brand can be attributed to operational headwinds in the business and assortment issues.
  • However, Gap continues to work towards revitalizing the brand along with its restructuring efforts. The company closed more than 90 stores last year and expects to close an additional 230 stores by the end of 2020. In addition, the company remains on track to grow its e-commerce channel, from where it expects to generate more than 40% of its business.

Old Navy Will Remain The Key Growth Driver Till Its Spin-off

  • Old Navy continued its impressive performance in fiscal 2018, delivering comp growth of 3% and we expect this performance to continue in Q1. Revenue per square foot also increased by 3% to $417 even as Old Navy continues to operate at higher margin rates as compared to other Gap brands. Moreover, Gap opened more than 75 Old Navy stores in 2018 as demand for the brand continues to rise.
  • Online trends for the brand also remained strong as the brand achieved double-digit increases in traffic and conversion during Q4 2018. The fundamentals for Old Navy remain strong and we expect this brand will continue to drive Gap’s growth in the near future as the brand continues to evolve itself according to the changing consumer habits to increase its market share and revenues.

Athleta Holds Strong Growth Potential

  • 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. Gap’s Athleta brand delivered a strong performance in fiscal 2018, further improving its market share, with the Girls business delivering an over 60% comp growth for the year. Athelta has been the fastest-growing segment of late, and we expect the momentum to continue through 2019.

Trefis Price Estimate

Based on our forecast, Gap Inc’s EPS for full-year 2019 is likely to be around $2.48. Using this figure with our estimated forward P/E ratio of 13x, this works out to a price estimate of $34 for the company’s shares, which is about 60% ahead of the current market price.

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