Banana Republic Revenue per Square Foot 2X Higher Than Old Navy
Gap Inc. (NYSE:GPS) is a global specialty retailer known for its Gap, Old Navy and Banana Republic brands, which compete with brands such as Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NASDAQ:URBN). The company derived about 80% of its $14 billion of revenues in 2009 from the US.
We estimate that Gap, Old Navy and Banana Republic stores constitute about 29%, 25% and 18% respectively of the $31 Trefis price estimate for Gap. Banana Republic stores have a Revenue per Square Foot (RPSF) of about $440, nearly two times greater than the $270 figure for Old Navy stores and slightly higher than the $390 per square foot earned by Gap stores.
Importance of Revenue per Square Foot
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Revenue per Square Foot is an important operating metric that drives margins and is used for measuring the performance of retailers like Gap. Retail real estate (e.g. rent), is one of the largest costs for retailers and RPSF measures how successful the company is in leveraging this key asset for generating returns.
Revenue per Square Foot Expected to Recover with Broader Economy
The RPSF for the three Gap brands were significantly impacted during the recent economic slowdown. However, as the economy recovers and consumer spending returns to pre-recession levels, we expect the RPSF for these brands to gradually increase and reach around $510 for Banana Republic and $290 for Old Navy by the end of the Trefis forecast period.
We forecast a higher growth rate for Banana Republic compared to Old Navy. Banana Republic operates in the affordable luxury segment, which, despite being heavily impacted during the economic downturn, has the potential for maximum growth in times of economic growth.
The rate of growth is expected to be partially weighed down by the increasing competition in the apparel industry, where the success of a brand largely depends on its ability to successfully predict fashion trends and consumer preferences.
Further Opportunities for Growth in Asia
The growing Asian market presents a tremendous opportunity for the company to leverage the market positioning of the Banana Republic brand. Currently, the company is expanding in this region through a franchise model.
The company’s franchise revenues from its Gap and Banana Republic brands accounts for less 1% of total revenues and is not reflected in the RPSF calculations. If the company plans a more aggressive approach to expansion in the Asian market, whereby it starts to directly operate stores in some of the key markets like Singapore, Malaysia, India and China, we believe that its RPSF can grow at nearly 2.5 times the current forecast growth rate for the period 2009-16, resulting in a 5% upside to the current Trefis price estimate for Gap’s stock.