Gap
(
GPS
), a leading global specialty retailer, reported its 3QFY10 results
last Friday. Gap competes with other specialty retailers
like Aeropostale (
ARO
),
Abercrombie & Fitch
(
ANF
),
J.Crew Group (
JCG
) and Urban Outfitters (
URBN
)
With Black Friday shopping deals around the corner, we noticed a
flurry of promotional activities such as Wal-Mart and Best Buy's
free shipping promise; however, we believe that aggressive
promotions might also hurt some retailers including Gap. In
particular, we are concerned that aggressive pricing campaigns
could lead to margin pressure causing us to adjust our
optimistic $34 Trefis price estimate for Gap's stock.
Consumer Outlook Modestly Improving
Recent consumer data and some earnings make us cautiously
optimistic on the consumer as we head into the holidays. As the
outlook for the US brightens versus easy comparables last year, we
could see a confidence for retailer stocks tick higher as the
holiday season gets underway, especially following the announcement
of J. Crew's potential buyout.
We are generally growing more positive on the retailers, and we
expect that major specialty retailers like Gap, Abercrombie &
Fitch and American Eagle will see decent sales figures this holiday
season in part due to increased promotional activities.
Last week we wrote that Abercrombie's earnings gave us increased
confidence in its profit margin and sales metrics outlook. (See
Abercrombie & Fitch Sales, Profitability Lift Outlook)
With Gap on the other hand, we saw an increase in its inventory
per square foot by 9% at the end of third quarter 2010, which may
lead to increased markdowns in order to drive sales and add
pressure to profit margins. While we are still positive on the
stock, we need to watch this.
Lower Margins From Promotional Activities
We are concerned that aggressive promotional activities this
holiday season could provide some downside risk to our current
profit margin forecasts. We expect EBITDA margins (a profit
margin measure) to trend modestly higher from around 15% currently
to around 17% in the coming years. However if this drops to 12%,
this would reduce our price estimate by around 5%.
See our full estimates for Gap here.