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GPS AT A GLANCE

P/E ► 12.4 AVG EV/EBITDA ► 6.28 AVG ROA ► 12.7% AVG ROE ► 21.1% AVG Debt to Equity ► 0.591 AVG Current Ratio ► 2.24 AVG Interest Coverage Ratio ► 110 HIGH

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

These declining sales numbers have sparked a turnaround process for the Gap as it focuses on cutting costs, choosing to hold less merchandise in the stores rather than maintaining traditional inventory levels and marking it down to turnover merchandise. Inventory per square foot declined 17% during the first quarter of fiscal 2008, as net profit increased nearly 40% despite a 4.6% decrease in net sales and an 11% decrease in comparable store sales.^[4] Tight inventory management and lack of markdowns allowed Gap's gross and operating margin in the quarter to increase to 39.6% and 12.1% from 38.2% and 9.2%, respectively.^[5]

The retail industry has exhibited mixed results in the face of a major downturn in the U.S. economy spurred by the subprime lending crisis in the summer of 2007 and record high oil prices. Overall consumer spending has declined, particularly on non-necessity fashionable apparel and accessories, which are the types of goods Gap's stores sell. As a result of the poor outlook for the U.S. economy the company increased its plans for store closings from 100 to 115, to match its planned store openings of 115, yielding a net change of zero locations for the year.^[6] In the long-term two potential sources for growth include further expansion abroad and online, as international and online sales grew 12.7% and 21% in the first quarter of 2008, respectively.^[7]

[edit] Business Overview

Gap Inc. is one of the largest companies in the apparel retail market with 3,177 store locations^[8] (as of Q2 FY08) and over $15 billion in annual sales^[9]. Despite its size and position as one of the largest apparel retailers in the U.S., Gap has been struggling since 2004, reporting negative same store sales growth in 2005-2007 (of -5%, -7% and -4% in each consecutive year respectively) as net sales have fallen every year since they peaked at $16.2 billion in 2004 to $15.7 billion in 2007.^[10] Despite falling sales, Gap has been able to maintain relatively healthy gross and operating margin figures, 36.1% and 8.3% in 2007, by managing inventory levels and staying away from merchandise markdowns and promotional selling activities that inflate operating expenses.

[edit] The Gap Brands

Gap has three distinct brands, each with its own target market and unique challenges. Banana Republic offers higher-priced clothing, Old Navy offers lower-priced clothing, and Gap falls in between. In 2007, Old Navy accounted for 42% of sales, with Gap responsible for 40% and Banana Republic accounting for about 17%.^[11]

[edit] Gap Stores

The Gap brand's main focus is casual attire targeted at consumers between the ages of 18 and 25. Additionally, The Gap has stores utilizing the Gap brand which target narrower segments of the retail apparel industry, including GapKids, babyGap, and gapbody.

The Gap has the largest footprint of the three brands both in the US and internationally, operating 1,245 stores in North America and 283 stores internationally as of May 2008.^[12]. Net sales for the Gap brand decreased almost 4% during 2007^[13] and same store sales at the Gap decreased 7% in the first quarter of 2008.^[14]

[edit] Old Navy

Targeting a value-conscious consumer, Old Navy offers lower-priced basics. Its primary consumer is either a “trade-up” customer who normally shops at a similarly priced apparel retailer like Wal-Mart, Target, or Kohl’s, or a “trade-down” customer looking for value basics and fashion. Like The Gap, Old Navy stores sell children's and infant clothing in addition to adult-sized clothing.

The Old Navy brand operates 1,065 stores in North America as of May 2008.^[15] Old Navy's net sales fell 2.4% in 2007^[16] while the brand's same store sales fell 4% in the first quarter of 2008.^[17] Old Navy faltered in the last few years because management attempted to sophisticate the merchandise at Old Navy, which hurt profitability and strayed from the target customer's demands. The brand is now re-focusing on delivering apparel and accessories for the whole family at compelling values.

[edit] Banana Republic

Deemed The Gap Inc.’s "affordable luxury" brand, Banana Republic was acquired in 1983. Its target market is the 25-35 age group. Banana Republic specializes in higher-end clothing and basics, carrying suits, personal care, and intimates.

Of Gap's three store-based brands, Banana Republic is the smallest in terms of number of locations, with only 584 total stores, 559 in North America, 24 in Asia and 1 in Europe.^[18] Also, while sales at Gap and Old Navy fell in 2007, Banana Republic's sales grew nearly 7% during the year^[19]. However, out of all of Gap's operations Banana Republic has been hit the hardest by the downturn in the U.S. economy which started in late 2007, with same store sales falling 18% in the first quarter of 2008^[20] as shoppers turned away from the higher prices of Banana Republic's merchandise.

[edit] Other Brands

Forth & Towne was launched in late 2005 with a target market of women between the ages of 35 and 45. However, after investing $40 million in the venture, the company abandoned the project in February 2007, citing low long-term returns on the investment and a more immediate need to focus on revitalizing its Gap and Old Navy brands.

Piperlime, a growing concept launched in late 2006, is Gap's attempt to use its experiences with the online retail operations of its three brands in order to enter a business that none of its three stores focus on: footwear. Piperlime is an online-only operation that sells designer shoes. Piperlime is largely separate from the rest of Gap, with its own team and deadlines. A key challenge for the company will be developing this venture in a profitable way--a particularly challenging goal in the super-competitive market for designer shoes. Piperlime has seen positive growth in 2008, helping to fuel 21% growth in Gap's online sales during the first quarter of 2008.^[21] (Read more about Gap's key trends and forces...)

[edit] References

1. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
2. ↑ | Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
3. ↑ | Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
4. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
5. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
6. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
7. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
8. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
9. ↑ | Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
10. ↑ | Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
11. ↑ | Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
12. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
13. ↑ | Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
14. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
15. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
16. ↑ | Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
17. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
18. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
19. ↑ | Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
20. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008
21. ↑ | Gap (GPS) Press Release, First Quarter Earnings Release 2008