The Gap Inc. (NYSE:GPS) is a global retailer offering apparel, personal-care products and accessories under six flagship brands of Gap, Banana Republic, Old Navy, Athleta, Piperlime and newly acquired Intermix. On April 17, it laid out the next phase of growth plans. This means that the company is at the onset of rapid progress. Can 2013 be a turnaround year for Gap?
Gap vs. the apparel retailer industry
Overall sales figures up in March
Net sales for The Gap Inc. (NYSE:GPS) in 2012 stood at $15.7 billion. The recent sales figures of Gap also seem impressive with total sales in March up by 7% reaching $1.56 billion after generating positive sales throughout the previous fiscal year. If I look at the breakdown of sales by brand, Banana Republic gained 1% while Old Navy dropped 2%. The growth in overall sales is a positive point for the investors who were concerned about the higher payroll taxes that could hit consumer spending and in turn affect retail stores. But that did not happen in The Gap Inc. (NYSE:GPS)’s case.
Big expansion plans with focus on China
China has become a huge market for apparel retailers due to the growing popularity of international brands in the minds of Chinese consumers. Not just Gap, every other apparel retailer in US is focusing on expansion online and overseas, mainly in China. During the recent meeting, The Gap Inc. (NYSE:GPS) said that it will begin to franchise Old Navy in certain international markets next year. It also plans to open around 160 company-run stores this year along with Gap China, Old Navy Japan and Athleta outlets. Gap’s multiple brand channels and geography model has been the differentiating factor for the company until now. Building on the success in online sales growth, The Gap Inc. (NYSE:GPS) also plans to merge online and brick-and-mortar shopping experiences. This strategy will meet the needs of customers wishing for an integrated shopping experience and drive store traffic and revenue.
Are the plans sustainable?
Gap’s ambitious plans are sustainable looking at the cash and cash equivalents from its operations. From the liquidity position of Gap, it can be inferred that it has reduced its debt significantly over the past two years. The current ratio of 1.76 gives an indication of the company’s operating cycle and its efficiency of turning its products into cash. The Gap Inc. (NYSE:GPS)’s operating cash flow stands at $2 billion, which suggests that it can support its future business strategies including growth initiatives and planned capital expenditures.
The peer market
American Eagle Outfitters (NYSE:AEO) is an American clothing and accessories retailer and enjoys a high brand recognition among teenagers. This is in contrast with Gap, which mainly defines fashion and has broader brand loyalty. American Eagle Outfitters witnessed higher total sales growth of 10% in the previous year and has focused on its 360-degree marketing plan. This plan is meant to establish the brand presence across all channels of communication like social media, TV, print and also includes commercials on mobile phones. The brand has always remained responsive to changing fashion trends, which is an important parameter to consider in the current teen apparel market. With increased store efficiency and lower cotton prices, American Eagle Outfitters’ margins remain high but the growth opportunities are less compared to Gap.
Urban Outfitters, Inc. (NASDAQ:URBN) is another fashion retailer operating mainly in the US, Canada and Europe. Due to decreasing profitability per store, the revenue share of Urban Outfitters has reduced over the years. The brand primarily targets young adults between 18 and 28 years old. The company’s revenue declined from 42% to 37% over the period of 2007-2012 due to a slow-moving inventory. As it ramped up its store count, the average sales per store did not go up proportionately. Compared to American Eagle Outfitters, Urban Outfitters has not scaled up its presence till now. However, it reported strong first-quarter results, owing to the strong revival of its Anthropologie brand. Urban Outfitters is looking to implement several strategies to reduce lead time and inventory turnover. It is also testing a different supply chain, brand design and communication, which will lead to a strong financial position in future.
The way forward for Gap
The apparel industry is showing great signs of improvement thanks to higher direct-to-consumer growth. Presently, The Gap Inc. (NYSE:GPS) has just a 4% share in the entire $300 billion North American apparel market and just a 0.25% share outside. The global apparel market is huge and is valued at $1.4 trillion. There is huge growth potential in both the home markets and overseas for Gap. Groundwork for The Gap Inc. (NYSE:GPS) is set, as the company achieved product and revenue momentum in 2012. Going forward, if Gap efficiently executes its ambitious plans, investors will have a lot of reasons to cheer.
The article Is 2013 a Turnaround Year for This Retailer? originally appeared on Fool.com and is written by Tanya Kanodia.
Tanya is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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