netrashetty
Netra Shetty
The Gap, Inc.[5] (NYSE: GPS) is an American clothing and accessories retailer based in San Francisco, California, and founded in 1969 by Donald G. Fisher and Doris F. Fisher. The company has five primary brands: the namesake Gap banner, Banana Republic, Old Navy, Piperlime and Athleta. As of September 2008, Gap, Inc. has approximately 135,000 employees and operates 3,076 stores worldwide, of which 2,551 are in the United States.[6] Gap, Inc. remains the largest specialty apparel retailer in the U.S., though it has recently been surpassed by the Spanish-based Inditex Group as the world's largest apparel retailer.[7]
Despite the company's publicly traded status, the Fisher family remains deeply involved in Gap, Inc.'s business and collectively owns a significant quantity of the company's stock.[8]
Donald Fisher served as Chairman of the Board until 2004 and remained on the board until his death on September 27, 2009. His wife and their son, Robert J. Fisher, also serve on Gap's board of directors. Robert Fisher succeeded his father as chair in 2004 and also became president and CEO on an interim basis following the resignation of Paul Pressler in 2007.
Glenn K. Murphy is the current CEO of the company. Previous Gap, Inc. CEOs include Millard Drexler and Paul Pressler.
Gap Inc. is a leading company in the apparel retail market with 3,085 store locations [3] and $14.2 billion in annual net sales.[4] Despite its size and position as a top apparel retailers in the U.S., Gap has been struggling since 2004 when net sales peaked at $16.2 billion reporting negative same store sales growth and consistent annual decreases in net sales through 2009. Despite this, net income has increased annually from 2007 to 2009. [5] For November, Gap reported a net sales increase of 6.3% to $1.42 billion compared to the same period from last year. Comparable store sales for the month increased 4%, compared to the flat comparable store sales from November 2009. Comparable store sales changes for Gap North America, Banana Republic, Old Navy North America, and international were 5%, flat, 5%, and -1% respectively. Gap attributes this sales growth to positive response to the brands' initial holiday offers.[6]
Business Financials[7]
In 2009, Gap realized a net income of $1.1 billion on net sales of $14.2 billion - this represented an increase in net income of 14% over 2008's net income of $967 million. Gap achieved this increase in profitability despite sinking revenues by slashing spending and increasing margins; gross margin rose from 37.5% in 2008 to 40.3% in 2009 and operating margin from 10.7% in 2008 to 12.8% in 2009. GPS has reversed its strategy of aggressive expansion to a strategy of store-count stability to account for consistently decreasing demand. [8]
Gap's profitability was also aided by its much-improved Q4 2009 holiday season compared to 2008; EPS in its stores increased 50% ($0.34 to $0.51).[9] The EPS rise was due to a 4% net sales increase from Q4 2008 and an operating margin of 13.4%, the highest operating margin Gap has had in a decade.[9]
Q1 Fiscal 2010 Results (ended April 30, 2010)
In Q1 2010 Gap posted revenues of $3.32 billion, up 6.5% from Q1 2009. Net income was $302 million, up a strong 40.5% from Q1 2009. Earnings per basic share were $.45, up from $.31 in Q1 2009. This strong performance rides on the back of increased consumer spending with many retailers experiencing strong results compared to 2009 . [10]
Q2 FY2010 Results (ended July 31, 2010)
Net sales increased 2 percent to $3.32 billion compared with $3.25 billion last year. Comparable store sales increased 1% compared with a decrease of 8% for the second quarter last year. Online sales were strong increasing 15% year over year. Operating margin increased 40 basis points to 12% compared with 11.6% last year. This is the highest second quarter operating margin in a decade. Net earnings grew 3% to $234 million compared with $228 million for the second quarter last year. EPS increased 9% to $0.36 per share on a diluted basis. [11]
Q3 FY 2010 Results (ended October 31, 2010)
Gap reported that net earnings decreased 1% to $303 million compared to 2009 Q3. This is primarily due to lower margins and higher income taxes; however, this was in line with analysts' estimates.[12] Operating income increased 1% to $504 million. GPS comparable store sales remained flat with no increase from the previous year while net sales increased 1.6% to $3.65 million. Gross profit declined to $1.5 billion from $1.52 billion. [12]During Q3, the company opened 25 and closed 19 store locations. For the rest of FY2010, the company expects to open 65 stores in total, especially in countries outside of the US. It also expects to close about 100 stores, especially for the Gap brand.[13]
Q4 FY 2010 Results (ended January 31, 2011)
For the fourth quarter, net sales increased 3% to $4.36 billion from the same period last year. Comparable store sales were flat compared to a 2% increase in fourth quarter of 2010.[14] Banana Republic North America, Old Navy North America, Gap North America, and International comparable store sales increased 1%, 1%, -2%, and -1% respectively.[15] Gap also raised its guidance for earnings per share for FY2010 to $1.85 to $1.86, compared to previous guidance of $1.77 to $1.82. This raise in guidance beats analyst’s expectations of $1.81 per share. For the year, net sales rose 3% to $14.66 billion, which is the same as analysts’ estimates.[16][17]
Business Segments
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. The Gap is divided into two segments: the retail segment (92% of FY09 sales) concerns all brick-and-mortar stores throughout the world. The direct segment (8% of FY09 sales) covers the company website and consolidates all sales of Old Navy, Gap, Banana Republic, Athleta and Piperlime sales conducted online. [18]
Gap Stores (40% of sales)
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 1,142 stores in North America and 301 stores internationally as of May 2010. [19]
Old Navy (41% of sales)
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 operated 1,035 stores in North America as of May 2010. [20]
Banana Republic (17% of sales)
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 606 total stores, 575 in North America, 27 in Asia and 4 in Europe.[21]
Other Brands (2% of sales)
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 GPS will be developing this venture in a profitable way--a particularly challenging goal in the super-competitive market for designer shoes. In 2008, Gap acquired Athleta, a line of women's active wear for $150 million. It opened its first physical 5000 square foot Athleta store in San Francisco in January 2011. This decision was based on its test store in Marin showing how shoppers bought 4 times as much in the store than via its online website in terms of revenues.[22] The line has been integrated into the company website, where all five brands (Gap, Old Navy, Banana Republic, Piperlime and Athleta) can be accessed at once.
Trends and Forces
Fast fashion brand Zara and Others Threaten Gap in the U.S.
Gap benefited in its inception in the 1990's from a number of advantages, including size, brand recognition, and long-standing relationships with landlords and vendors. However, it is now confronted by competition due to low barriers to entry and replicable merchandising techniques. H&M, J. Crew and Zara are some of the brands competing with Gap.
Zara (owned by Inditex), a fast-fashion retailer specializing in bringing the latest runway trends to cost-conscious consumers at low prices. Zara may be stealing customers from traditional U.S. brands like Gap because of their high fashion appeal. Inditex reported revenue of €11.1 billion ($15.5 billion*) in fiscal 2009 compared to €10.4 billion ($15.2 billion*) in fiscal 2008. This makes Inditex the largest apparel retailer in the world, overtaking Gap. Inditex operates 8 brands with 4,705 stores in 76 countries. In 2009 10.2% of Inditex sales came from the Americas. Sales in the Americas totaled $1.56 billion, up 10% from 2008, showing Zara's increasing popularity in the region. [23]
Zara mimics Gap's merchandising strategy of offering differentiated stylish-yet-affordable basic apparel that appeals to the masses. Zara's strong point is in its logistics system, in which a design can go from a sketch on paper to an actual product in stores in less than two weeks. The industry average for the same process is nine months. To compete Gap keeps its inventories very lean, meaning it avoids profit-damaging promotions and sales. It avoids advertising in order to cut down on costs. This competition has affected Gap's performance with its revenues declining from 2005-2009. <[24]
Using average euro/dollar exchange rate for that year. [25]
Economic Headwinds Complicating Turnaround
From 2004-2010, Gap's sales have been faltering and it is in the midst of a turnaround effort, focusing on maintaining profit margins (gross and operating) while fostering sales growth. This has proven difficult in the second half of 2007 and into 2010 due to economic conditions. After the subprime lending crisis in the summer of 2007 the U.S. economy is struggling and many banks and slid into a recession in 2008. As such, consumer spending has been shifting away from non-necessary goods, such as fashion apparel. Consequently, apparel retailers have been struggling to maintain sales ever since. As the economic outlook is uncertain at best, Gap has cut back on its store expansion plans and increased its store closure plans.
The economy failed to improve in 2009, leading The Gap to decrease its operating expenses. In March GPS decided to decrease the size of its board to 10 members from 13 and will cut stock compensation for the remaining members by 15%. The chairman and chief executive has also decided to cut his salary by 15% and Gap has done away with merit-based bonuses for headquarters employees.[26]
International Growth: Diversifying Sources of Sales
In the long term, Gap plans on expanding their international operations from their current base of 332 stores (as May 2010) between Europe and Asia. The Gap's international operations are split between the Gap and Banana Republic - Old Navy does not have stores outside of North America. Gap's merchandise has Western appeal abroad but that appeal will have to be sustained in the face of competition from brands with extensive distribution networks such as Giordano's (1,800 stoes), Uniqlo (800 stores), and Inditex (3,400 stores). [27]
Gap Europe: 179 stores
Gap Asia: 122 stores
Banana Republic Europe: 4 stores
Banana Republic Asia: 27 stores[28]
Gap currently has franchise agreements in place for 24 countries on 4 continents. 130 franchise stores are open in Asia, Europe, Latin America (including Mexico's leading department store Distribuidora Liverpool) and the Middle East. In 2010 Gap plans to open stores its first stores in Australia and China. [29]
Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[30] [31] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [32][33] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.
In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[30] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[30]
Competition
Gap's four major brands target different customers with very differing merchandise mixes. As such, each brand competes with a different set of other retailers:
Old Navy targets middle-class families who seek basic apparel and accessories at low prices and consequently competes with value-based department stores like Kohl's (KSS) and discounters such as Wal-Mart Stores (WMT). Old Navy has seen decreasing same store sales growth for the past three years, largely due to merchandising issues. Management believes that in time the brand will recover after re-focusing the merchandising.
Gap's middle-of-the-road approach to providing basic pieces of apparel (T-shirts, khakis, blouses, jeans, etc.) at mid-range prices puts it in competition with stores such as American Eagle Outfitters (AEO) and Aeropostale (ARO). Gap also competes with some department stores that provide similar apparel at mid-range prices like J.C. Penney (JCP) .
As a "near luxury" retailer Banana Republic faces strong competition from other purveyors of higher-priced and higher-quality apparel and accessories, such as Polo Ralph Lauren, J. Crew Group, Zara and Abercrombie & Fitch Company (ANF).
Company Revenue 2009 (mm) Gross Margin Operating Margin Revenue Growth (Decline) from 2008 Same Store Sales Growth (Decline) Total Stores Sales per Store (thousands)
Gap (GPS) $14,197 40.3% 12.8% (2.2%) (3.0%) 3,095 $1,332
American Eagle Outfitters (AEO) $2,990 38.7% 7.9% 0.6% (4.0%) 1,076 $2,404
Aeropostale $2,230 38.0% 10.3% 18.0% 10.0% 952 $2,206
Urban Outfitters (URBN) $1,834 38.8% 10.8% 21.7% 7.8% 327 $4,453
Inditex Group (Zara) €11,100 ($15,500*) 21.4% 11.9% 6.73% n/a 4,705 $2,482
J. Crew Group (JCG) $1,578 58.2% 14.2% 10.6% 1% 321 $3,457
Polo Ralph Lauren (RL) $4,978 58.2% 9.6% 1.7% (4.5%) 315 $6,146
Abercrombie & Fitch Company (ANF) $2,928 64.3% 8.6% (15.9%) (23.0%) 1,098 $2,412
[34] [35] [36] [37] [38] [39] [40] [41][41] [42]
Using average euro/dollar exchange rate for that year. [43]
Latest Full Context Quarter Ending Date
2010/10
Gross Profit Margin
44.5%
EBIT Margin
13.7%
EBITDA Margin
17.4%
Pre-Tax Profit Margin
13.6%
Interest Coverage
124.3
Current Ratio
1.9
Quick Ratio
0.7
Leverage Ratio
1.8
Inventory Turnover
3.9
Asset Turnover
1.8
Revenue to Assets
1.9
ROE from Total Operations
27.4%
Return on Invested Capital
27.4%
Return on Assets
15.4%
Debt/Common Equity Ratio
0.00
Price/Book Ratio (Price/Equity)
2.88
Book Value per Share
$7.07
Total Debt/ Equity
0.00
Long-Term Debt to Total Capital
0.00
SG&A as % of Revenue
27.0%
R&D as % of Revenue
0.0%
Receivables per Day Sales
$0.00
Days CGS in Inventory
93
Working Capital per Share
$3.36
Cash per Share
$2.28
Cash Flow per Share
$2.87
Free Cash Flow per Share
$1.53
Tangible Book Value per Share
$6.82
Price/Cash Flow Ratio
7.1
Price/Free Cash Flow Ratio
13.3
Price/Tangible Book Ratio
2.98
Most recent data
5-Year Averages
Return on Equity
19.8%
Return on Assets
11.8%
Return on Invested Capital
19.2%
Gross Profit Margin
40.8%
Pre-Tax Profit Margin
10.3%
Post-Tax Profit Margin
6.3%
Net Profit Margin (Total Operations)
6.3%
R&D as a % of Sales
0.0%
SG&A as a % of Sales
27.2%
Debt/Equity Ratio
0.03
Total Debt/Equity Ratio
0.05
Most recent data
Despite the company's publicly traded status, the Fisher family remains deeply involved in Gap, Inc.'s business and collectively owns a significant quantity of the company's stock.[8]
Donald Fisher served as Chairman of the Board until 2004 and remained on the board until his death on September 27, 2009. His wife and their son, Robert J. Fisher, also serve on Gap's board of directors. Robert Fisher succeeded his father as chair in 2004 and also became president and CEO on an interim basis following the resignation of Paul Pressler in 2007.
Glenn K. Murphy is the current CEO of the company. Previous Gap, Inc. CEOs include Millard Drexler and Paul Pressler.
Gap Inc. is a leading company in the apparel retail market with 3,085 store locations [3] and $14.2 billion in annual net sales.[4] Despite its size and position as a top apparel retailers in the U.S., Gap has been struggling since 2004 when net sales peaked at $16.2 billion reporting negative same store sales growth and consistent annual decreases in net sales through 2009. Despite this, net income has increased annually from 2007 to 2009. [5] For November, Gap reported a net sales increase of 6.3% to $1.42 billion compared to the same period from last year. Comparable store sales for the month increased 4%, compared to the flat comparable store sales from November 2009. Comparable store sales changes for Gap North America, Banana Republic, Old Navy North America, and international were 5%, flat, 5%, and -1% respectively. Gap attributes this sales growth to positive response to the brands' initial holiday offers.[6]
Business Financials[7]
In 2009, Gap realized a net income of $1.1 billion on net sales of $14.2 billion - this represented an increase in net income of 14% over 2008's net income of $967 million. Gap achieved this increase in profitability despite sinking revenues by slashing spending and increasing margins; gross margin rose from 37.5% in 2008 to 40.3% in 2009 and operating margin from 10.7% in 2008 to 12.8% in 2009. GPS has reversed its strategy of aggressive expansion to a strategy of store-count stability to account for consistently decreasing demand. [8]
Gap's profitability was also aided by its much-improved Q4 2009 holiday season compared to 2008; EPS in its stores increased 50% ($0.34 to $0.51).[9] The EPS rise was due to a 4% net sales increase from Q4 2008 and an operating margin of 13.4%, the highest operating margin Gap has had in a decade.[9]
Q1 Fiscal 2010 Results (ended April 30, 2010)
In Q1 2010 Gap posted revenues of $3.32 billion, up 6.5% from Q1 2009. Net income was $302 million, up a strong 40.5% from Q1 2009. Earnings per basic share were $.45, up from $.31 in Q1 2009. This strong performance rides on the back of increased consumer spending with many retailers experiencing strong results compared to 2009 . [10]
Q2 FY2010 Results (ended July 31, 2010)
Net sales increased 2 percent to $3.32 billion compared with $3.25 billion last year. Comparable store sales increased 1% compared with a decrease of 8% for the second quarter last year. Online sales were strong increasing 15% year over year. Operating margin increased 40 basis points to 12% compared with 11.6% last year. This is the highest second quarter operating margin in a decade. Net earnings grew 3% to $234 million compared with $228 million for the second quarter last year. EPS increased 9% to $0.36 per share on a diluted basis. [11]
Q3 FY 2010 Results (ended October 31, 2010)
Gap reported that net earnings decreased 1% to $303 million compared to 2009 Q3. This is primarily due to lower margins and higher income taxes; however, this was in line with analysts' estimates.[12] Operating income increased 1% to $504 million. GPS comparable store sales remained flat with no increase from the previous year while net sales increased 1.6% to $3.65 million. Gross profit declined to $1.5 billion from $1.52 billion. [12]During Q3, the company opened 25 and closed 19 store locations. For the rest of FY2010, the company expects to open 65 stores in total, especially in countries outside of the US. It also expects to close about 100 stores, especially for the Gap brand.[13]
Q4 FY 2010 Results (ended January 31, 2011)
For the fourth quarter, net sales increased 3% to $4.36 billion from the same period last year. Comparable store sales were flat compared to a 2% increase in fourth quarter of 2010.[14] Banana Republic North America, Old Navy North America, Gap North America, and International comparable store sales increased 1%, 1%, -2%, and -1% respectively.[15] Gap also raised its guidance for earnings per share for FY2010 to $1.85 to $1.86, compared to previous guidance of $1.77 to $1.82. This raise in guidance beats analyst’s expectations of $1.81 per share. For the year, net sales rose 3% to $14.66 billion, which is the same as analysts’ estimates.[16][17]
Business Segments
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. The Gap is divided into two segments: the retail segment (92% of FY09 sales) concerns all brick-and-mortar stores throughout the world. The direct segment (8% of FY09 sales) covers the company website and consolidates all sales of Old Navy, Gap, Banana Republic, Athleta and Piperlime sales conducted online. [18]
Gap Stores (40% of sales)
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 1,142 stores in North America and 301 stores internationally as of May 2010. [19]
Old Navy (41% of sales)
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 operated 1,035 stores in North America as of May 2010. [20]
Banana Republic (17% of sales)
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 606 total stores, 575 in North America, 27 in Asia and 4 in Europe.[21]
Other Brands (2% of sales)
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 GPS will be developing this venture in a profitable way--a particularly challenging goal in the super-competitive market for designer shoes. In 2008, Gap acquired Athleta, a line of women's active wear for $150 million. It opened its first physical 5000 square foot Athleta store in San Francisco in January 2011. This decision was based on its test store in Marin showing how shoppers bought 4 times as much in the store than via its online website in terms of revenues.[22] The line has been integrated into the company website, where all five brands (Gap, Old Navy, Banana Republic, Piperlime and Athleta) can be accessed at once.
Trends and Forces
Fast fashion brand Zara and Others Threaten Gap in the U.S.
Gap benefited in its inception in the 1990's from a number of advantages, including size, brand recognition, and long-standing relationships with landlords and vendors. However, it is now confronted by competition due to low barriers to entry and replicable merchandising techniques. H&M, J. Crew and Zara are some of the brands competing with Gap.
Zara (owned by Inditex), a fast-fashion retailer specializing in bringing the latest runway trends to cost-conscious consumers at low prices. Zara may be stealing customers from traditional U.S. brands like Gap because of their high fashion appeal. Inditex reported revenue of €11.1 billion ($15.5 billion*) in fiscal 2009 compared to €10.4 billion ($15.2 billion*) in fiscal 2008. This makes Inditex the largest apparel retailer in the world, overtaking Gap. Inditex operates 8 brands with 4,705 stores in 76 countries. In 2009 10.2% of Inditex sales came from the Americas. Sales in the Americas totaled $1.56 billion, up 10% from 2008, showing Zara's increasing popularity in the region. [23]
Zara mimics Gap's merchandising strategy of offering differentiated stylish-yet-affordable basic apparel that appeals to the masses. Zara's strong point is in its logistics system, in which a design can go from a sketch on paper to an actual product in stores in less than two weeks. The industry average for the same process is nine months. To compete Gap keeps its inventories very lean, meaning it avoids profit-damaging promotions and sales. It avoids advertising in order to cut down on costs. This competition has affected Gap's performance with its revenues declining from 2005-2009. <[24]
Using average euro/dollar exchange rate for that year. [25]
Economic Headwinds Complicating Turnaround
From 2004-2010, Gap's sales have been faltering and it is in the midst of a turnaround effort, focusing on maintaining profit margins (gross and operating) while fostering sales growth. This has proven difficult in the second half of 2007 and into 2010 due to economic conditions. After the subprime lending crisis in the summer of 2007 the U.S. economy is struggling and many banks and slid into a recession in 2008. As such, consumer spending has been shifting away from non-necessary goods, such as fashion apparel. Consequently, apparel retailers have been struggling to maintain sales ever since. As the economic outlook is uncertain at best, Gap has cut back on its store expansion plans and increased its store closure plans.
The economy failed to improve in 2009, leading The Gap to decrease its operating expenses. In March GPS decided to decrease the size of its board to 10 members from 13 and will cut stock compensation for the remaining members by 15%. The chairman and chief executive has also decided to cut his salary by 15% and Gap has done away with merit-based bonuses for headquarters employees.[26]
International Growth: Diversifying Sources of Sales
In the long term, Gap plans on expanding their international operations from their current base of 332 stores (as May 2010) between Europe and Asia. The Gap's international operations are split between the Gap and Banana Republic - Old Navy does not have stores outside of North America. Gap's merchandise has Western appeal abroad but that appeal will have to be sustained in the face of competition from brands with extensive distribution networks such as Giordano's (1,800 stoes), Uniqlo (800 stores), and Inditex (3,400 stores). [27]
Gap Europe: 179 stores
Gap Asia: 122 stores
Banana Republic Europe: 4 stores
Banana Republic Asia: 27 stores[28]
Gap currently has franchise agreements in place for 24 countries on 4 continents. 130 franchise stores are open in Asia, Europe, Latin America (including Mexico's leading department store Distribuidora Liverpool) and the Middle East. In 2010 Gap plans to open stores its first stores in Australia and China. [29]
Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[30] [31] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [32][33] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.
In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[30] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[30]
Competition
Gap's four major brands target different customers with very differing merchandise mixes. As such, each brand competes with a different set of other retailers:
Old Navy targets middle-class families who seek basic apparel and accessories at low prices and consequently competes with value-based department stores like Kohl's (KSS) and discounters such as Wal-Mart Stores (WMT). Old Navy has seen decreasing same store sales growth for the past three years, largely due to merchandising issues. Management believes that in time the brand will recover after re-focusing the merchandising.
Gap's middle-of-the-road approach to providing basic pieces of apparel (T-shirts, khakis, blouses, jeans, etc.) at mid-range prices puts it in competition with stores such as American Eagle Outfitters (AEO) and Aeropostale (ARO). Gap also competes with some department stores that provide similar apparel at mid-range prices like J.C. Penney (JCP) .
As a "near luxury" retailer Banana Republic faces strong competition from other purveyors of higher-priced and higher-quality apparel and accessories, such as Polo Ralph Lauren, J. Crew Group, Zara and Abercrombie & Fitch Company (ANF).
Company Revenue 2009 (mm) Gross Margin Operating Margin Revenue Growth (Decline) from 2008 Same Store Sales Growth (Decline) Total Stores Sales per Store (thousands)
Gap (GPS) $14,197 40.3% 12.8% (2.2%) (3.0%) 3,095 $1,332
American Eagle Outfitters (AEO) $2,990 38.7% 7.9% 0.6% (4.0%) 1,076 $2,404
Aeropostale $2,230 38.0% 10.3% 18.0% 10.0% 952 $2,206
Urban Outfitters (URBN) $1,834 38.8% 10.8% 21.7% 7.8% 327 $4,453
Inditex Group (Zara) €11,100 ($15,500*) 21.4% 11.9% 6.73% n/a 4,705 $2,482
J. Crew Group (JCG) $1,578 58.2% 14.2% 10.6% 1% 321 $3,457
Polo Ralph Lauren (RL) $4,978 58.2% 9.6% 1.7% (4.5%) 315 $6,146
Abercrombie & Fitch Company (ANF) $2,928 64.3% 8.6% (15.9%) (23.0%) 1,098 $2,412
[34] [35] [36] [37] [38] [39] [40] [41][41] [42]
Using average euro/dollar exchange rate for that year. [43]
Latest Full Context Quarter Ending Date
2010/10
Gross Profit Margin
44.5%
EBIT Margin
13.7%
EBITDA Margin
17.4%
Pre-Tax Profit Margin
13.6%
Interest Coverage
124.3
Current Ratio
1.9
Quick Ratio
0.7
Leverage Ratio
1.8
Inventory Turnover
3.9
Asset Turnover
1.8
Revenue to Assets
1.9
ROE from Total Operations
27.4%
Return on Invested Capital
27.4%
Return on Assets
15.4%
Debt/Common Equity Ratio
0.00
Price/Book Ratio (Price/Equity)
2.88
Book Value per Share
$7.07
Total Debt/ Equity
0.00
Long-Term Debt to Total Capital
0.00
SG&A as % of Revenue
27.0%
R&D as % of Revenue
0.0%
Receivables per Day Sales
$0.00
Days CGS in Inventory
93
Working Capital per Share
$3.36
Cash per Share
$2.28
Cash Flow per Share
$2.87
Free Cash Flow per Share
$1.53
Tangible Book Value per Share
$6.82
Price/Cash Flow Ratio
7.1
Price/Free Cash Flow Ratio
13.3
Price/Tangible Book Ratio
2.98
Most recent data
5-Year Averages
Return on Equity
19.8%
Return on Assets
11.8%
Return on Invested Capital
19.2%
Gross Profit Margin
40.8%
Pre-Tax Profit Margin
10.3%
Post-Tax Profit Margin
6.3%
Net Profit Margin (Total Operations)
6.3%
R&D as a % of Sales
0.0%
SG&A as a % of Sales
27.2%
Debt/Equity Ratio
0.03
Total Debt/Equity Ratio
0.05
Most recent data