Weak Sales Could Dampen View of Gap

| About: The Gap, (GPS)

Gap (NYSE:GPS) is a global specialty retailer that operates the Gap and Old Navy brands and competes with retailers such as Aeropostale (NYSE:ARO), American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NASDAQ:URBN). We estimate that Gap and Old Navy stores each constitute roughly 27% and 26% of our $35.51 our price estimate for Gap’s stock, which is around 50% above the market price. Banana Republic stores add an additional 17% while Internet orders & franchise business constitute 22%.

Slow Start to 2011

Though Gap did well for the full year 2010, it particularly struggled in January and February this year. In January, the YoY comparable store sales for Gap were flat while that for Old Navy dropped 3% in North America. For the full fiscal year 2010, company-wide net sales grew 3% with comparable store sales up 1%. [1]

In February, company net sales were down 2% while company wide comparable sales, which includes the comparable online sales, dropped 3%. The YoY comparable sales including the associated comparable online sales for Gap, Old Navy and Banana Republic were down 1%, 4% and 4% respectively and international comparable sales were down 7%. [2]

Some of its competitors also did considerably well. For example the same store sales for Buckle and Wet Seal increased 2.1% and 7% respectively. [3]

(Chart created by using Trefis' app)

Going After New Customers

In order to gain market share, Gap is planning to realign its marketing strategy to cover a larger demographic including younger customers as well as African, Spanish and Asian customers. [4] In addition, the company is looking to continue its international growth plans this year, firstly in Japan. After opening a Gap flagship store in one of Japan’s biggest shopping districts, it may also launch an e-commerce site specifically for Japan. [5]

We estimate that the revenue per square foot for Gap stores decreased from between from 2005 to 2008, driven by falling comparable store sales. This was a continuation of the trend that started towards the end of the 90′s when the company started to struggle with staying on top of emerging fashion trends. Failed marketing campaigns and management decisions on real estate strategy contributed to an increasing store base and falling sales.

However, the revenue per square foot for Gap stores recovered to nearly $400 in 2010. Going forward, we expect it to further improve, as the company has significantly reduced its store base and launched some successful marketing campaigns to reconnect with its target demographic and is also trying to expand its customer base. However, if weak sales data come in over the next few months, there can be a downside to our forecasts.

If the revenue per square foot for Gap stores decreases to $300 by the end of our forecast period, it would result in a downside of nearly 7% to our current price estimate for Gap’s stock.


  1. Gap Reports January Sales Results
  2. Gap Reports February Sales Results
  3. Consolidated Summary of February Retail Sales Results
  4. Gap To Shift Marketing to Attract New Customers
  5. Gap expands its ecommerce takeover to Japan

Disclosure: No positions