Revenue per Square Foot Begins to Recover at Gap and Old Navy Stores

| About: The Gap, (GPS)
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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 stores and Old Navy stores each constitute nearly 28% of the $34 Trefis price estimate for Gap’s stock.

Gap Revenue per Square Foot Fell in Recent Years

Between 2005 and 2008, the revenue per square foot (RPSQF) for Gap stores fell from $430 to $390 while Old Navy revenue per square foot fell from $370 to $260. Failed marketing campaigns resulted in weak sales and over expansion exacerbated declines in revenue per square foot.

The $66 billion (in 2005) specialty clothing industry increased at an annual growth rate of nearly 3% from 2005 to 2008. During this period, Gap’s market share slid downward by 4%.

Revenue per Square Foot for Gap and Old Navy Stores Buck the Trend in 2009

However, in 2009, the revenue per square foot (RPSQF) for both Gap stores and Old Navy stores increased, while those for competitors like Abercrombie & Fitch and American Eagle were falling. We believe this is an inflection point in the revenue per square foot for these two Gap brands.

The company has significantly reduced its store base and launched some successful marketing campaigns to reconnect with its target demographic. The relaunch of Gap’s denim range, which historically has been one of the major drivers of the company’s sales, has received a positive response.

In addition to this, the Old Navy brand became increasingly popular during the economic downturn, as consumers became more value conscious. The brand as a growing customer base and huge potential for generating more sales.

Gap’s First Quarter Results for 2010 Are Encouraging

Gap has reported strong Q1 results for 2010, with comparable store sales at Gap stores and Old Navy stores increasing by 2% and 7%, respectively, compared to the same quarter last year. Over our forecast period, we expect that Gap would be able to regain a significant portion of its lost market share, with revenue per square foot for Gap stores reaching around $470 and that for Old Navy reaching around $340.

You can modify our forecasts for the revenue per square foot for Gap stores and Old Navy stores to see their impact on Gap’s stock price.

Disclosure: No positions