) operates its namesake Gap brand in addition to Old Navy and
Banana Republic, and competes with other specialty retailers
like Aeropostale (
Abercrombie & Fitch
) and Urban Outfitters (
). We estimate that Gap and Old Navy stores each constitute a
little over a quarter of the company's stock value. Banana Republic
stores, while still significant, add a smaller 17%.
Our price estimate for Gap stock, at $35.51, is about 50% above
The Cost of Living is Increasing in the U.S.
The consumer price index (a measure of inflation) increased by
0.5% in February, the highest for any month in nearly two years and
above analyst forecasts. In total, consumer prices have increased
just over 2% during the 12 months ended February 2011. The
inflationary pressure affects profit margins of retailers like Gap
that face increasing raw material costs, with global cotton prices
rising over the last year. While raising prices on goods can offset
these added costs, retailers might be hesitant to do so as consumer
spending and employment levels remain pressured.
Gap Looking to Consolidate U.S. Store Count
Gap is aiming to improve its operational efficiency by
eliminating a few underperforming stores. The company is looking to
consolidate its U.S. store count, while expanding internationally.
As a result, Gap could end up closing 200 stores in the U.S. over
the next two years.
The company has been gradually reducing the number of Gap stores
since 2001, due in part to declining demand. Going forward, we
expect the decreasing store count in the U.S. to be offset by
international store openings in locations like Europe and Asia
Gap Profit Margin Outlook
Gap stores' EBITDA margin has been trending upwards since 2006,
hitting an estimated 15.5% in 2010. We anticipate continued, albeit
moderate, growth going forward towards 17% by the end of our
forecast period. However, inflation could pressure profit margin
growth and create downside to our base case forecast.
To illustrate this affect, we estimate that a 300 basis point
drop-off from our base case by the end of our forecast period (in
other words, a slight decline towards 14%) would suggest 4%
downside to our $35.51 price estimate for Gap stock. While this
does add risk, investors should consider the greater picture - this
scenario would still leave our price estimate well ahead of market
See our full analysis for Gap stock