Cold March to weigh on Gap's otherwise solid results

However, the overall revenue growth will remain healthy owing to the retailer's strong direct-to-consumer channel.

By Trefis May 22, 2013 9:35AM
Shopping (© imagewerks/Getty Images/Getty Images)Quick take
  • Gap is scheduled to release its first quarter fiscal 2013 earnings on May 22. Gap's first quarter revenue growth stood at 7% with comparable store sales increasing by just 2%.
  • The retailer performed well during February and April due to strong marketing and seasonal product offerings. However, the prolonged cold in March weighed on its results as demand for spring clothing declined.
  • We expect the strength in the direct-to-consumer channel to continue, which will drive Gap's overall revenue growth.

Gap (GPS) is scheduled to release its first quarter fiscal 2013 earnings on May 22. According to a recent press release, the company will report just 2% growth in comparable store sales (CSS) due to weaker-than-expected results in March. While Gap performed well during February and April driven by the strength in its marketing and product offerings, its performance slipped in March due to an unusually cold weather which impacted the demand for seasonal products. However, the overall revenue growth will remain healthy owing to the retailer's strong direct-to-consumer channel. We'll also look for any color on Gap's progress on the international front.


Marketing, seasonal collection will complement growth

Gap registered strong comparable store sales growth of 3% and 7% in February and April respectively finding support from its appealing marketing campaign and strong seasonal product offerings.


About a year ago, Gap launched the "Be Bright" campaign for its seasonal collection in collaboration with Ogilvy. Through this campaign, the retailer leveraged fashion blogs to market its products and attract customers. Gap introduced a website, Styld.by, in partnership with popular fashion and lifestyle blogs such as Lookbook, FabSugar, etc., which appears to be doing well for the retailer. According to a 2011 Technorati report, the consumer trust on traditional media has declined by 46% since 2006. Around 35% consumers trusted blogs to be credible sources of information and 19% agreed with the idea that they are better written than traditional media sources. Gap's Styld.by blog partners collectively have about 1 million average unique monthly visitors. This has helped the retailer generate more interest among customers and improve its brand image, and the impact was visible in its monthly results.


For the spring of 2013, Gap launched a variety of products such as classic denims, colored denims, printed shorts, blazers khakis and strips, which was promoted through FabSugar. In partnership with Diane von Furstenberg, the company launched an attractive spring collection for GapKids and babyGap featuring trends such as signature prints, classic silhouettes and vibrant colors. Also, Gap introduced a limited edition collection of Jimi Hendrix (iconic musician) T-shirts globally in the honor of his 70th birthday. Given the popularity of the musician and the brand's historic connection with music, this T-shirt is expected to garner significant customer attention.


Gap Store Revenue Per Sq FootWhat happened in March?

Although Gap was well positioned during the quarter, March did not live up to the retailer's expectations. This year, the winter in the U.S. persisted longer than usual with March being the coldest in the last 17 years. The prolonged cold hampered spring clothing sales. For instance, the demand for shorts during the fourth week of March 2013 fell by 12% compared to the previous year. The same issue weighed on Gap's growth in March as its comparable store sales declined by 1% during the month. Overall this dragged down the retailer's first quarter comparable store sales growth to 2%.


Strong direct-to-consumer channel

Despite a small increase in comparable store sales, Gap's revenue growth will remain robust at 7% backed by its direct-to-consumer business. Not just Gap, but also retailers like Urban Outfitters (URBN) and Abercrombie & Fitch (ANF) have experienced substantial growth in their direct-to-consumer channels. Below is a table showing Gap's direct-to-consumer revenue growth over the past few years complemented by the industry trend, the retailer's mobile apps and mobile-optimized sites.


Year
2009 2010 2011 2012
Direct-to-consumer Revenues ($ Bil) 1.26 1.49 1.84 2.26
% Growth 6.9% 18.7% 23.4% 22.5%


Online retail is gaining tremendous popularity in the U.S. due to growing Internet usage and the proliferation of smartphones and tablets. We believe there is huge growth potential for the online apparel retail market. To strengthen this channel, Gap launched an iPad app in 2010 to make its customer shopping experience more social. Moreover, the retailer's mobile-optimized sites enable customers to browse and shop online as well as locate a nearby store. Gap also recently launched an e-commerce website in Japan, which completes its online presence in key markets such as Europe, Asia and North America.


Gap Internet Orders and Franchise Business RevenuesProgress on International Expansion

While Gap Inc. is consolidating its underperforming stores in the U.S., it is looking to expand in select international markets. In its last quarterly earnings, it stated that it will open about 35 new Gap stores in China and 15-20 Old Navy stores in Japan in fiscal 2013. Since China is the second largest apparel market in the world and is expected to cross $200 billion by 2014, Gap's aggressive expansion in the region seems justified.


Moreover, this is the first time Old Navy will be expanding outside North America and given Japan's potential for value-based brands, it will be something to watch out for. We'll keep an eye out on the retailer's progress on these fronts and any additional updates regarding its international expansion plans.


Our price estimate for Gap Inc. at $40, implying a premium of about 5% to the market price.

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