) profit margins at its namesake brand stores have been increasing
since 2007, driven by successful control of inventory and average
unit cost (AUC), leading to higher merchandise margins. Going
forward, the overall lower demand in the apparel market caused by a
weak economy could result in slower margin growth.
Gap competes with other specialty retailers
like Aeropostale (
Abercrombie & Fitch
), J.Crew Group (
We expect that Gap's EBITDA margin will increase gradually to
17% by 2016, with promotional activity providing a potential
headwind. In comparison, the Trefis community anticipates that
margins could reach 19.5% by the end of our forecast period,
suggesting an upside of 4% to our price estimate for Gap.
We currently have a Trefis price estimate of $33.87 for Gap
Inc.'s stock, well ahead of market value.
Control on Operating Expenses
Gap's economic model stresses cost control. This means that if
Gap spends more in one area, then it will aim to reduce costs in
another area so as to maintain discipline on overall expenses.
Gap reduced its marketing expenses by 25% between 2006 and 2008.
Although this was followed by a subsequent 18% increase between
2008 and 2009, total operating expenses remained almost flat.
In addition, Gap's focus on controlling AUC has enabled it to
deliver healthy merchandise margins. As the company continues to
achieve operational efficiencies, margins could improve
Falling Demand in Apparel Industry
The market size of the US apparel industry is estimated to have
declined by around 5% in 2009, compared to 2008. This can largely
be attributed to falling consumer spending, especially in the upper
income and teen demographics, as well as weak personal disposable
income levels over the past few quarters. These factors could
pressure Gap Stores sales, which would ultimately impact its EBITDA
Trefis Community Forecast
Trefis community forecasts for Gap Stores EBITDA margin indicate
a projected increase from 16.2% in 2010 to 19.5% by 2016, compared
to the baseline Trefis estimate of an increase from 15.5% in 2010
to 17% during the same period. The community estimates imply an
upside of 4% to the Trefis price estimate for Gap's stock.
complete analysis for Gap Inc.'s stock is here