Old Navy Is Worth 30% More Than What The Market Currently Values Gap At

Earlier this year, Gap (NYSE: GPS) announced its plan to split into two independent publicly traded companies – an independent Old Navy, and a yet-to-be christened new company (“New Entity”) that would include a portfolio of niche brands in denim (Gap), upper middle-class fashion (Banana Republic), female athleisure (Athleta), and men’s performance lifestyle (Hill City). Trefis answers the question: How Much Could Old Navy Be Worth As A Separate Company? in an interactive dashboard by first detailing the reasons behind Gap’s decision to split into two companies, and then estimating the value of Old Navy as a standalone company. You can also understand how Gap is likely to look after the Old Navy spin-off in an older interactive dashboard. Additionally, you can find more Trefis Textiles, Apparel and Luxury Good Industry Data here.

Why Is Gap Splitting Into Two Companies?

• Old Navy has been the strongest brand under Gap’s diversified brand portfolio, and the company plans to unlock significant value by spinning-off its star brand.
• The spin-off will also help the new company to focus on its struggling Gap Global brand by better allocating resources and developing tailored strategies for the brand.
• Finally, Old Navy offers value-based products that are different from Gap’s other brands. Separating the brand will help Old Navy and Gap target different audiences more efficiently. This is likely to help grow the company’s customer base at a faster rate going forward

How has the Old Navy brand performed over recent years?

Old Navy Is Responsible For A Majority of Gap’s Revenues

• Gap has added $1.06 billion to total revenue since 2016, growing at an average annual rate of 3.4%.
• This growth has been driven almost completely by Old Navy, which contributed more than 95% of the revenue growth over this period.
• The Old Navy brand alone has added $1.03 billion to the top line at an average annual rate of 7.3%.
• In sharp contrast, Gap Inc’s core brand, Gap Global, has continued to struggle. The brand lost roughly $300 million in revenues over the last three years, falling at an average annual rate of 2.7%

Old Navy’s Comparable Sales Figure Has Also Seen Strong Growth Over Recent Years

Comparable sales is a key metric that is used to determine the performance of a company in the apparel industry.

• Gap’s consolidated comparable sales declined by 2% in 2016 and they were flat in 2018
• Moreover, Gap’s second-largest brand, Gap Global, has constantly delivered negative comparable sales growth in the last three years, with this key metric declining by 3% in 2016 and 5% in 2018.
• However since 2016, this metric for Old Navy has steadily increased, achieving a growth rate of 1% in 2016 and 3% in 2018

Moreover, Old Navy Enjoys Higher Revenue Per Store Compared To The Gap Brand

• Old Navy has enjoyed a higher revenue per store than Gap, with this metric steadily increasing over the last few years.
• As of 2018, Old Navy’s revenue per store stood at $6.8 million; roughly 30% more than Gap’s $5.2 million

How has Old Navy’s revenue trended over the recent years?

• Old Navy’s revenue per square foot has increased from $387 in 2016 to $417 in 2018 as the brand has continued to operate at higher margin rates as compared to other Gap brands.
• Moreover, Old Navy’s square feet per store has gone down as the brand has continuously restructured its specialty fleet.
• Old Navy’s store count has increased from 1056 in 2016 to around 1154 in 2018.
• However, the company’s management feels 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.

Estimating Old Navy’s value as a separate company

Since the spin-off is expected to be completed by the end of FY2019, we have valued the company based on FY2020 forecasts

• Based on our forecasts for Old Navy’s revenues and expenses, we expect Old Navy’s FY’20 Net Income to be around $517 million – representing a net interest margin figure of 6.3%.
• We value the Old Navy brand at about 15x projected FY’20 EPS – slightly higher than Gap’s current trading multiple of 14x, but lower than the industry-average trading multiple of 35x.
• A multiple of 15x has been taken since Old Navy is more profitable than the combined company and is poised to achieve strong revenue growth in the future.
• However, this multiple is lower than the industry average as many competitors in the industry have larger scale and better profitability than Old Navy

How does our valuation of Old Navy compare with Gap’s current market cap and our estimate for Gap’s Valuation?

• Gap’s current market cap is around $6.2 billion which is roughly 70% lower than our current valuation of $10.7 billion for the company.
• Old Navy’s projected valuation $7.8 billion represents a figure that is more than 70% of our forecast for Gap’s valuation.
• At the same time, this figure is a good 30% higher than Gap’s current market cap.
• Keeping in mind the fact that we use a conservative P/E multiple for Old Navy, the sizable difference between our estimate for Old Navy’s potential valuation and Gap’s current market cap shows that there is considerable value that can be unlocked by the spin-off.

Conclusion: Old Navy could be worth $7.8 billion as a separate company

• The Old Navy brand has been pivotal to Gap’s performance in recent years led by strong sales growth in its online and mobile channels.
• 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 going forward
• The fundamentals for Old Navy remain strong and we expect this brand to continue to achieve steady 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.
• Moreover, online trends for the brand have remained strong as Old Navy has achieved double-digit comps growth thanks to robust traffic and conversion rates in the last few years
• Although, it will actually be more expensive to run two separate companies (each with its own support staff, CEO and board), the benefits are likely to outweigh these costs in the long run
• Based on our forecast, Old Navy’s adjusted net income for fiscal 2020 is likely to be around $517 million. Using this figure with our estimated P/E ratio of 15x, we arrive at a valuation figure of $7.8 billion for Old Navy.

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