Apparel retailer Gap (NYSE:GPS) has had a good fiscal 2012, with 6.5% and 5% growth witnessed in revenues and comparable store sales respectively, in the first nine months.  However, the international results have been weak primarily due to the tough economic environment in Europe. In this analysis, we will discuss the factors that will drive Gap in 2013.
After the success of its first stores in China, Gap is looking to expand its international footprint further by entering Brazil. In the U.S., the booming direct-to-consumer channel in the apparel industry will complement Gap’s growth. The retailer recently launched its e-commerce channel in Japan, which favors Gap’s long term outlook. Additionally, the brand focused leadership will allow individual segments to focus more on gaining market share in their respective markets.
Booming Online Segment In The Apparel Industry
Currently, the apparel industry in the U.S. is being driven by the growth in direct-to-consumer channel. It is evident from the fact that some of the key players, such as Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NASDAQ:URBN), have reported substantial growth in direct-to-consumer business in their recent results. Moreover, Gap’s own direct-to-consumer revenues increased by 23% in its Q3 fiscal 2012. This implies that Gap has benefited from the ongoing direct-to-consumer trends in the apparel industry, and it is likely to continue in the next year as well. With the increasing popularity of online shopping and the recent launch of Gap’s Japan e-commerce, we expect this segment to be a notable driver for the future.
The internet and franchise business contributes about 25% to Gap’s value according to our estimates.
International Business Outlook
Gap’s results from its international business have been weak for the past couple of years, but have shown improvement. At the end of Q3 fiscal 2012, the year-to-date international comparable store sales decreased by 4%, which was an improvement over a 7% decline observed in the same period last year.  This can be attributed to the weak economic condition in Europe, which has also troubled retailers such as Abercrombie & Fitch and Guess? (NYSE:GES). However, according to the European commission, the economic growth is expected to pick up slightly in 2013.  Although the recovery will be slow, we expect Gap’s Europe sales growth to improve.
Currently the Japanese market is weak as its economy has been sluggish. However, Japan can be a lucrative market for the U.S. apparel retailers as indicated by the encouraging response received by Urban Outfitters on launch of its Free People brand. Gap’s growth in the region will be complemented by the launch of its own e-commerce channel. Along with various brands such as Gap, GapKids, BabyGap and Banana Republic, the retailer will also provide additional benefits such as as free shipping for purchases above 6,000 yen, free in-store returns within 30 days, and the details of design and fabric of its apparel online. 
Gap Inc. recently opened its first store in China, the world’s second largest economy. In the current scenario, China provides a huge potential for the apparel retailers as evident from Coach’s (NYSE:COH) substantial growth in this region. Moreover, the lack of direct competition from players such as Aeropostale (NYSE:AEO) and American Eagle Outfitters (AEO) will inspire Gap to expand aggressively in China.
Gap recently announced that it will open its first store in Brazil in the fall of 2013. Brazil is the largest economy in Latin America and the fifth largest country in the world, thus offering good growth potential.  As is the case with China, the lack of competition from Gap’s U.S. counterparts such as Abercrombie & Fitch, American Eagle Outfitters and Aeropostale will work in Gap’s favor. Apart from Brazil, Gap’s Latin American presence encompasses Panama, Columbia, Mexico, Chile and Uruguay. 
New Global Brand Management Structure Might Help In Gaining Market Share
Under the new global brand management structure, Gap named individual leads for the divisions such as Banana Republic, Old Navy, Gap stores etc.  A particular segment’s global stores operations, internet business and franchisee business will be brought together under the single management of that segment. Due to the anticipated growth in China, the chairman and CEO will directly oversee the operations in the region.  The new structure will be implemented in the beginning of the fiscal year 2013.
Although this might not lead to any immediate financial benefits, the focus on becoming segment specific will allow the individual teams to be more responsive to the changing needs of the customers in different markets and segments.
Our price estimate for Gap Inc. at $39, implying a premium of about 25% to the market price.
- Gap’s SEC filings
- Spring Forecast: towards a slow recovery, European Commission, May 11 2012
- Gap Inc. launches e-commerce sites in Japan, fibre2fashion, Oct 11 2012
- Gap Announces Plans to Open First Gap Stores in Brazil, Gap Inc., Dec 18 2012
- Gap Inc. Creates Global Brand Management Structure to Drive the Company’s long term growth, Financial Post, Oct 16 2012
Disclosure: No positions.