Gap (GPS) is a global specialty retailer of apparel and accessories. The Gap stores constitute nearly 28% of the $34 Trefis price estimate for Gap’s stock. On balance we see little reason for optimism about Gap’s future growth prospects.
Gap’s revenue per square foot has been falling
Revenue per square foot for Gap stores slipped from $430 in 2005 to $390 in 2008, driven by falling comparable store sales. This unhappy tendency dates back to the late 1990s, when the company started losing touch with emerging fashion trends. Failed marketing campaigns and poor real estate decisions left Gap with too many stores and falling sales. In addition, Gap alienated its core customer base by moving away from signature basics into younger, trendier styles.
Similarly, revenues per square foot declined between 2005 and 2008 for Gap’s other retail brands, Old Navy and Banana Republic. Both recovered in 2009 and may perform better than Gap stores during our forecast period. Old Navy operates in the value price segment, which gained popularity during the recent economic slowdown. Banana Republic sells affordable luxury clothing, demand for which is expected to increase as the economy recovers and consumer spending picks up.
Gap’s business model can easily be replicated
In the 1990s, Gap emerged as one of the first national specialty retail chains in the U.S., differentiating itself by offering stylish clothing at affordable prices. But as Gap grew, its large store base led to longer procurement cycles and lower inventory turn rates. And Gap’s business model was easily replicated because it lacked strong product differentiation in an industry with low barriers to entry and minimal switching costs.
Downside to Gap’s Stock
In an indication that Gap’s fortunes might be improving, revenues per square foot recovered slightly in 2009, compared to declines for major retailers like Abercrombie & Fitch (ANF) and American Eagle (AEO). But unless Gap manages to differentiate its business model and/or product offerings, its revenues per square foot seem likely to stagnate at current levels. As a result, there might be up to 5% downside to our current forecast for Gap’s stock. You can modify our revenue-per-square-foot forecast to see its impact on the $34 Trefis price estimate for Gap’s stock.
Disclosure: No positions