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Gap: Everyone in the Same Tired Stuff

|Includes: AAPL, AEO, ANF, ARO, The Gap, Inc. (GPS), JCG, PSUN

By: Stiletto Stocks

Hi TDL darlings, sorry for my prolonged absence. I pulled an Alice in Wonderland and drank a funny little bottle of unidentified liquid labeled “Drink Me” and here I am, one month later with a new pair of Marc Jacobs shoes and some new stamps in my passport that I can’t quite make out. So, where to start than talking about everybody’s favorite-but-forgettable store in the mall. And no, I’m not talking a certain sketchy magazine rack behind the food court.

Research released by Goldman Sachs derivatives traders today advised investors to buy bullish November calls on The Gap ($GPS) ahead of October sales results, announced later this week. Gap, the parent company of Old Navy and Banana Republic, reports Q3 2009 earnings Nov. 19, and Goldman is suggesting the company may beat projections for revenue and sales. As I have discussed in the past, same-store sales data are critical in the retail world, and historically can drive large swings in retail stores’ stock price. The Goldman analysts forecast that sales data will be above consensus due to recent and upcoming sales promotions (I have a 30% off Gap stores promotion for November 12-15 sitting on my desk as we speak—apparently, all the ladies in my office have me pigeon-holed as “the fashion crazy girl.”) The research briefing also discusses the currently attractive pricing of options and $GPS’ low implied volatility relative to peers as rationale behind its recommendation of buying November $22 calls for 0.90.

If you’ve been chart-watching this AM, $GPS got a nice little bump, and at time of writing is trading at 22.28, 1.6% above the 22.01 open. Nothing to write home about until Nov. 19.

From my vantage point, Gap has made some substantial improvements to help begin to pull it out of its slump beyond the factors the analysts mention. Namely, the company’s branding and positioning. Remember when Gap was hip? Think of the old ads—fresh, clean, almost Apple-like TV spots that featured catchy music, dancing, and often-zany colors that appeal to an increasingly design-forward and neurotic American buying public. Then, Gap got old. Generic. If you were like everyone else, you wore Gap (or Old Navy/Banana Republic, depending on your income level.) Even the advertisements became generic. Remember the “Everybody in Leather/Cords/Vests/etc.” campaign? The target demographic (teens through young families) don’t want to look and dress like “everyone else”—at least, they don’t want to be told they do! (By the way, does anyone notice how there's a dude choking in the above photo? Must be staring at the jumping guy's crotch!)

In many ways, Gap is the Apple of the apparel retailing world. Everyone has at least one item of clothing from a Gap company, much like everyone has an iPod and increasingly an iPhone. The two have store presentations that are sleek, pleasingly minimalist, and blissfully unprepossessing. Unlike $PSUN, $ANF, or many other retailers, you don’t feel you need to be a specific size, age, or ethnicity to shop at Gap, or own an Apple product. But where Apple has shined and Gap (for the past several years) has faltered is in brand presence and presentation. When you buy an Apple product, you are buying into a hip alternative to Microsoft’s “square” products. You are part of a unique tribe of consumers who are creative, unique, and “think different.” Gap, meanwhile, has positioned itself as the store in the mall that will clothe anyone. There’s something to be said about Abercrombie CEO Mike Jeffries’ ideas about maintaining brand exclusivity—when you sell to everyone, you’re bound to lose a lot of shoppers in the process. No one feels cooler after buying a boring old pair of Gap khakis—at least, that has been the story in past years.

Today, Gap is starting to show signs of hipper times. The company launched its 1969 Premium denim, which it launched with a sexy, American Apparel-esque advertising campaign a few months ago. The jeans promise the style and high quality of $200 designer jeans for starting price tag of around $60. And to be honest, these jeans are great. Improving sales after several quarters of slump aside—the company is getting back its leaner, younger-minded image. Since May 2009, $GPS has generally outperformed the S&P Retail Index (^RLX) appreciably—on the year, $GPS has climbed nearly 70%, while the index has gained around 30%. Look back in time to 2005-2008 for comparison: Gap was a veritable dog, lagging the sector up to 20% during that timeframe.

Much like $ANF, Gap is moving increasingly into international markets (Gap franchises currently exist in more than two dozen countries), and the company will be opening its first store in China in 2010. International and online businesses have grown to about one-fifth of the company’s sales, and the company is smartly steering itself in that direction (tacitly acknowledging the weary state of apparel retailing in the US). Revamping the company’s product lines has taken Gap of fashion life support, and if global retail demand continues, the brand has a real chance of getting back its old place on the shelf of “cool generic” with IKEA, Apple, and other Stuff White People Like.

Disclosure: long $ANF, long $AAPL at time of writing.