Gap (NYSE:GPS), a leading global specialty retailer offering clothing, accessories and personal care products, primarily competes with stores like Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters, (NYSE:AEO).
The Gap and Old Navy stores each constitute around 27% of our $33.87 price estimate for Gap’s stock.
Retail Sales Figures Strong Over Holidays
Comparable store sales for Gap in North America were up 5% YOY in November 2010 while company-wide comparable store sales increased 4%. This growth continued a trend from October, which saw comparable store sales for Gap in North America up 5% YOY. Similarly for Gap’s more budget focused brand, Old Navy, the comparable store sales in November was up 5%. Year-to-date, company-wide comparable store sales are up 4% for Gap.  
Though going into the holiday season there had been a lot of concern regarding consumer spending, retail sales, excluding auto, rose to $584 billion for the period Nov 5 to Dec 24, according to MasterCard Advisors’ Spending Plus. This is a 5.5% increase from last year and the best performance over the last five years. 
The revenue per square foot for Gap brands had been falling between 2005 and 2009. This was a continuation of the trend that started towards the end of the 90’s when the company started losing touch with the emerging fashion trends. Failed marketing campaigns and management decisions on real estate strategy resulted in an increasing store base and falling sales. However, recently Gap has been working hard on its marketing strategy in order to reconnect with its target demographic. We discussed the turnaround at Gap and Old Navy stores in an earlier article: "Revenue per Square Foot Begins to Recover at Gap and Old Navy Stores."
We believe that the increased consumer spending during the holiday season discussed above can result in an upside to our current forecasts for revenue per square foot for Gap and Old Navy stores. Currently we estimate the revenue per square foot for Gap stores to increase from $394 in 2009 to $402 in 2010 and then go on to increase at an annual growth rate of 2.7%, reaching $470 by the end of our forecast period.
Similarly, we estimate the revenue per square foot for Old Navy stores to increase from $267 in 2009 to $277 in 2010 and then go on to increase at an annual growth rate of 3.5%, reaching $340 by the end of our forecast period. However, as we wait for the December sales results for Gap, we believe the strong performance year to date for Gap coupled with strong consumer spending trends during the holiday season can provide an upside to our forecasts. If revenue per square foot for Gap stores and Old Navy stores increase to around $420 and $290 respectively for 2010 and reach $520 and $390 respectively by the end of our forecast period, it would mean an upside of around 7% to our price estimate for Gap’s stock.
Disclosure: No position