The Gap Inc. (NYSE:GPS) will report Q2 2014 results on Thursday after market. The earnings call can be accessed by calling 1-855-5000-GPS or 1-855-500-0477 (participant passcode: 8282339). International callers may dial 913-643-0954.
Consensus expects $0.69 EPS (+7.8% y/y) on $3.97b in revenue (+2.5% y/y), vs. $3.98b (+3% y/y) that the company reported earlier. GAP also guided EPS in the range of $0.73-$0.74, of which there is a $0.05 per share gain on asset sale. Adjusting for the asset sale, the company expects EPS to be between $0.68 and $0.69, or in line with consensus.
Focusing on brand and value proposition
In my view, discount and deep-value retailers such as H&M, ZARA, UNIQLO will continue to put downward price pressure on traditional retailers such as Gap, whose price premium and value proposition place the brand at a disadvantage, thereby escalating the likelihood that Gap may need to cut prices to stay competitive in an event of a fashion miss. Moreover, Gap's focus on American style while charging a premium price shows that it is losing touch with the overall industry trend of affordable fashion.
On the other hand, Old Navy's value proposition as an affordable family-oriented brand, and Banana Republic's focus on young, urban working professionals are competitive against their respective peers. As such, I believe those two brands will become long-term growth drivers for the company. I note that in both May and June, Old Navy global comps +2% and +7%, respectively, compared with Gap (-3%/-7%) and Banana Republic (+3%/-7%).
More accessories please
Gap's current brand and value proposition places the company at a difficult spot when competing against the other fast and deep value retailers. Behind the scenes, Gap needs to make a considerable amount of investment in ecommerce and supply chain to keep up with the latest fashion trend and meet the consumer demand. On the store level, moving beyond simple apparel and focus on more accessories is critical for sustainable revenue growth. A good example would be Michael Kors (NYSE:KORS), which really differentiates from its peers by emphasizing on accessories and ecommerce.
To counter the declining trend in apparel, Gap should focus on non-apparel categories such as footwear, beauty products, and accessories. Finally, women's sportswear is a good strategic area to focus on with the Athleta brand as women are placing greater emphasis on fitness and non-contact fitness programs (i.e. yoga). Athleta's attractive price points could be appealing to entry-level fitness enthusiasts who look for both value and practicality, in my view.
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