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GAP INC (GPS)

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Gap Inc. is an apparel retailer with more than 3,000 stores that includes the clothing chains The Gap, Old Navy, Banana Republic, and Forth & Towne. It is present in the U.S., Canada, U.K., France and Japan. The company has suffered from sales underperfomance in the last few years, leading to several management changes.

1 Company Analysis
2 News Feed
3 Risks
4 Research Links
5 Options
6 Notes

Today

Max

Funds w/ GPS:	81
Rank:	271 / 351

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Company Analysis

Gap Inc. operates four retail chains with over 3000 stores located throughout the United States. Here is a brief summary of the Gap Inc.'s four divisions:

In 2005, Old Navy pulled in $6.8 billion in sales, making it the highest grossing of the Gap Inc.'s divisions. Old Navy focuses on casual, low priced clothing. In targeting a young and active market, Old Navy competes with American Eagle, Aeropostale, H&M, Abercrombie & Fitch. Old Navy's monthly sales, year over year, have been consistently flat or negative for the past several years with no improvement in sight. Like the Gap (discussed below), Old Navy has fared far worse than its competitors in recent years because the trend in retail has become increasingly to target highly focused market sectors. For instance, H&M's target customer is a highly fashion conscious urban female with a preference for quantity and hipness over quality. The typical H&M customer replaces her wardrobe on an almost seasonable basis. Abercrombie and AE focus on a more suburban, semi-outsdoorsy customer, even younger than H&M. Old Navy lacks the focus that more successful retailers are taking, and has struggled to define itself in an ever more fractured marketplace. ON fourth quarter sales: down 9% versus negativ 6% last year. ouch.

The Gap, the company's second largest division ($5.4 billion in 2005) suffers a similar problem. Its January sales were negative 6% versus positive 3% last January. During its heyday, the Gap excelled at marketing "the basics": Ts, kakis, denim. The Gap targets an even broader audience than Old Navy, presumably attempting to appeal to teens, twenty-somethings, thirty-somethings, and beyond. The gap has veered wildly in its marketing approach over the last several years. One season it takes on a more urban look; the next it tries to hark back to its salad days with a return to the basics. The retailer has not yet gained any traction.

Banana Republic was also suffering until recently but finally shows some sign of a reversal. It is the smallest of the divisions, grossing $2.3 billion in 2005. BR is higher priced, with a more sophisticated, grown-up target audience. January '07 sales were positive 14% last year compared to negative 6% last year. Fourth quarter: positive 3% vs. negative 5%.

Forth & Towne targets an older female customer. It competes directly with Talbots. There are only a few Forth & Towne stores and its future remains unclear.

The good news about Gap is that despite its fashion woes, it remains in healthy financial condition. It has low debt, and a stockpile of cash. The company expects to earn about 90 cents per share in 2006.

While GPS's share price has languished over the past several years, it has enjoyed a modest uptick lately over buyout rumors, including the possibility that BR may be sold to private equity.

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News Feed

10/10/08 12:10 pm	Midday Glance: Specialty Retail companies (AP)
10/10/08 10:10 am	Early Glance: Specialty Retail companies (AP)
10/10/08 8:10 am	UPDATE - Friedman cuts price target on US apparel retailers (at Reuters)
10/10/08 7:10 am	Zara Thrives by Breaking All the Rules (BusinessWeek)
10/09/08 10:10 pm	[$$] September Made More Retailers Wince (at The Wall Street Journal Online)
10/09/08 6:10 pm	Business Highlights (AP)
10/09/08 6:10 pm	IBD's Top 10 - Thursday (Investor's Business Daily)
10/09/08 5:10 pm	Final Glance: Specialty Retail companies (AP)
10/09/08 4:10 pm	GM, IBM, Gap, Morgan Stanley among big movers (AP)
10/09/08 2:10 pm	Apparel chains report dismal September sales (AP)

More News...

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Risks

The risk is that the gap will continue to languish. But unless the company starts taking some really expensive, really bad gambles, it will remain in business, since it has plenty of cash and is cash flow positive. So if you're looking to take a risk on a down-and-out retailer, the Gap won't go bankrupt any time soon. But for the Gap to be a good investment, it will need to figure out how to adopt to a more fragmented marketplace than the one in which it came of age.

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