Having performed well through most of fiscal 2013,
) comparable store sales declined in September 2013 due to
prevailing retail market weakness. The company's net sales remained
flat and comparable store sales decreased by 3% compared to a 6%
increase in September 2012. This weak performance is attributable
to a subdued U.S. apparel market caused by cautious consumer
spending and a change in spending patterns.
Although the month was challenging, Gap Inc's management
believes that it can still deliver on its full-year goals. We also
remain optimistic on the company's long term outlook since it has
performed well in the past when most apparel retailers in the U.S.
were struggling. Growth in Gap Inc's e-commerce business and
aggressive international expansion support our bullish outlook.
Our price estimate for Gap Inc. at $50
implies a premium of about 25% to the market price.
See our complete analysis for Gap Inc.
Weak Retail Market Weighed On September Results
The back-to-school season this year was particularly weak for
apparel retailers in the U.S. due to the impact of payroll tax hike
and high unemployment. At the start of the season, the National
Retail Federation (NRF) conducted a survey that suggested a sharp
decline in consumer spending during the back-to-school season.
According to NRF, spending by families with school-age children
will decline by almost 8% during this season compared to the same
period last year. Moreover, average spending by college students
and their families was also expected to decline by a similar
amount. Also, there has been a change in consumer spending patterns
as consumers are diverting their spending to houses and cars to
take advantage of low interest rates. As a result, they are holding
back on purchasing smaller products such as apparel and
As a result, U.S. retailers are relying on deep discounts to win
back customers, which is weighing heavily on their growth.
According to the Commerce Department, retail sales in August
excluding the automotive sector increased by just 0.1%. While Gap
Inc managed to post positive growth in August, it faltered to the
industry weakness in September. The comparable store sales decline
was more profound for
which is a relatively expensive brand, confirming that U.S. buyers
are scaling back their spending on non-discretionary products.
Other apparel retailers such as Zumiez Inc, The Buckle Inc and
American Apparel Inc also posted comparable store sales declines
However, E-Commerce Growth Should Drive The Company In
Direct-to-consumer channel (mainly e-commerce) is the second
most important division for Gap Inc, accounting for about 28% of
its value, according to our estimates. The overall online apparel
retail industry has shown robust growth over the past few years and
Gap Inc has been at its forefront. The company's e-commerce
revenues have increased by more than 60% during the last two years
and they further jumped 27% during the first two quarters of fiscal
2013 despite a difficult retail environment.
We believe that this growth will continue as the outlook for the
global online retail market is very optimistic. eMarketer forecasts
online apparel sales in the U.S. to increase to about $90 billion
by 2016, up from $45 billion in 2012. In Europe, online retail
sales are expected to grow at a compounded annual growth rate of
11% for the next five years. Given the trend in the U.S., online
apparel retail will likely exceed the overall industry growth.
China is no different as eMarketer forecasts e-commerce sales in
China to increase from $110 billion in 2012 to $440 billion in
2016. Gap Inc plans to launch an e-commerce website in the region
in the first half of fiscal 2014. In addition to the industry
growth, the retailer's own efforts such as the launch of mobile
apps, mobile-optimized sites and ship-from-store services can help
it remain a step ahead. Overall, this channel appears to be
well-poised to boost Gap Inc's long-term growth.
Continued International Expansion Will Also Help
Expanding in international markets not only opens up new revenue
channels, but also helps in diversifying geographical risk.
Contrary to its peers such as Abercrombie & Fitch (
), Aeropostale (
), Urban Outfitters (
) and American Eagle Outfitters (
), Gap Inc has been aggressive with its international expansion.
The company opened 30 of its namesake stores in China last year and
plans to open about 35 stores this year along with its first
store. Following the launch of
stores in Japan, Gap Inc stated that it will introduce
the brand in China in fiscal 2014. China is the second largest
apparel market in the world with a huge pool of fashion conscious
customers. Total apparel sales in the region increased from
$110 billion in 2009 to $140 billion in 2012, and are expected to
reach $220 billion by 2016.
Gap Inc is also planning to launch its namesake stores in
Taiwan, which is gaining traction due to increased presence of
fast-fashion brands, improving consumer confidence and growth in
online sales. Apart from Asia, the retailer can continue
expanding in Europe as the region's economy is showing some signs
of revival. Two of the largest economies in the region - Germany
and France - grew faster than expected in the second quarter,
indicating that the euro zone is recovering from its recession.
How a Company's Products Impact its Stock Price at