Better Market Conditions Complement Gap Inc’s Strong Position And Brands

With its strong understanding of consumer preferences and wide customer reach, Gap Inc (NYSE:GPS) has established a strong image for itself in the U.S. apparel market. By consistently delivering products that resonate very well with trend conscious buyers, the retailer has sustained a steady sales growth rate even amid an unconducive retail environment. Although Gap Inc’s February and March sales were subdued by extreme temperatures that prevented store visits, it recorded 9% comparable sales growth in April primarily driven by pent-up demand. This trend persisted in May as U.S. buyers continued shopping aggressively to fulfill their apparel needs. The company’s revenues increased by 4% during the month and its comparable sales rose by 1%. While the retailer’s comparable sales growth seems slow, it must be noted that it was on top of 7% growth in the same month last year. ^[1]

Gap Inc’s strong footing in the U.S. apparel market, and its resilience against the edgy retail environment, arise from its expansive product portfolio and vast reach, and that helps it cater to a large group of customers. The retailer operates three different brands for three main demographics:   Old Navy for cost and fashion conscious teenagers, Gap for young adults, and Banana Republic for more affluent and relatively older customers. Furthermore, Gap Inc has been proactive in keeping its products in line with changing trends and seasons, with effective inventory management. We believe that the retailer’s clean inventory position at the start of the month also had a part to play in its strong May sales.

Our price estimate for Gap Inc is at $51.20, implying a premium of about 25% to the market price.

See our complete analysis for Gap Inc.

Better Market Conditions With Improving Weather And Healthier Job Growth

After a slump in the first three months of 2014, sales trends in the U.S. were notably better in April and continued to improve in May. The U.S. witnessed a harsh winter season this year, which kept many buyers away from stores. This resulted in significant pent-up demand that eventually uplifted retail sales growth in April, when weather was less harsh to step out. The group of eight retailers tracked by Thompson Reuters (having heavy weighting in its retail index), which includes Gap Inc, reported a 6.4% rise in sales during the month. Following strong sales in April, the residual pent-up demand helped several retailers, including Costco (NASDAQ:COST) and Gap Inc,realize strong sales in May. The group of retailers reported an increase of 4.6% in their May sales, while Thompson Reuters predicted the growth to be around 3.9%. ^[2]

In addition to improving weather conditions, a better job scenario also encouraged consumers to spend more freely. U.S. employers added about 217,000 new jobs in May, which was the fourth consecutive month of significant job gains. Monthly job growth for the last three months now averages at 234,000, significantly higher than the average monthly gains from the prior three months (150,000). ^[3]

Strong Footing In The Market Backed By Wide Reach And Vast Product Variety

Gap Inc is one of the biggest and oldest apparel players in the U.S. The company’s main brand Gap was launched in 1969, which operates close to 1,400 stores today. The retailer acquired Banana Republic in 1983 and expanded it to 640 stores in 2013. Since the opening of its first Old Navy store in 1994, Gap Inc has expanded the brand aggressively. Today, the retailer operates over 1,000 Old Navy stores in the U.S. and has recently launched this brand in international markets. Overall, the company has close to 2,700 stores in the U.S., which is more than the combined store count of American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF) and Aeropostale (NYSE:ARO). This is a clear indication of Gap Inc’s access to a lot more customers than its peers. Moreover, the retailer appears to be operating its stores more efficiently than its competitors, considering that retailers such as American Eagle Outfitters and Aeropostale are consolidating their domestic store fleet due to weak demand.

The reason why Gap Inc has outperformed its counterparts is because it caters to a large demographic, knows what its customers want and creates an appealing shopping experience for each individual brand. Old Navy mainly offers affordable on-trend casual clothing for value and trend conscious high school and college students in a unique and energizing shopping environment. Its website reflects an array of vibrant colors and features different products under discounts every week. It provides categories such as women’s dresses, jeans for the entire family, swim suits, flip flops, etc. That way it covers a wider customer base while maintaining interest in the brand. At Gap, the company offers its products at higher prices than Old Navy and targets working professionals along with teenagers. The brand’s website is more subtle, with products such as polos, jeans, khakis and cardigans. Banana Republic is Gap Inc’s affordable luxury brand, which has an organized website reflecting a sense of expensiveness. It offers versatile workwear for men and women for all occasions, ranging from desk to dinner. Occasionally, the brand partners with leading designers to offer an exclusive and limited addition collection. Although Gap Inc is a casual apparel retailer, it has created different markets for itself with each brand targeting distinct groups of buyers. This has worked well for the company so far and is likely to continue the same way.

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1. Gap Inc Reports May Sales Results, Gap Inc, Jun 5 2014 [↩]
2. U.S. retailers beat sales expectations in May, Reuters, Jun 5 2014 [↩]
3. U.S. Adds 217,000 Jobs In May, Unemployment Rate Remains At 6.3%, Huffington Post, Jun 6 2014 [↩]