| Author | Message | ||
     Entrepreneur Kurra Bewarse Username: Entrepreneur Post Number: 3391 Registered: 05-2011 Posted From: 65.35.45.47 Rating: N/A |
GPS Gap is gapping higher today on earnings; makes us think spinning off Old Navy makes sense (26.72 +1.42) Gap (GPS +6%) is gapping nicely higher today following its Q4 (Jan) earnings report. This was a nice rebound after the apparel retail giant disappointed investors last quarter. What stands out right off the bat is that Gap reported a sizable $0.10 EPS beat even though revenue came up light. That tells us that margins were significantly better than expected. The shortfall in sales was caused by a mid-quarter resurgence in COVID cases that resulted in unplanned mandated store closures or restrictions across Canada, Japan, China, and Europe as well as through parts of the US, including California and the Northeast, which impacted store traffic. There is definitely a disparity among Gap's four key brands and has been for some time. Old Navy and Athleta have been the stars of the show while Gap and Banana Republic have been laggards. That trend played out again in the same store comps in Q4: Old Navy +7%, Athleta +26%, Gap -6%, and BR -22%. Its Intermix unit is undergoing a strategic review. Another example of brands' success is that Old Navy gained share in 2020 to become the number two apparel brand in the US, second only to Nike (NKE), and Athleta surpassed $1 bln in sales and grew 16% for the full year despite the pandemic. Combined, Old Navy and Athleta represented 63% of 2020 sales, on the way to the company's target of 70% by the end of 2023. In order to turn Gap around, the company has been closing underperforming stores, reducing mall exposure, and increasing its focus on online sales. As for BR, they are also closing stores and, more importantly, have new leadership, as Sandra Stangl has recently taken over. She is tasked with repositioning BR for a post-COVID world through relevant marketing and products and a boosted digital profile. GPS is clearly making progress boosting online sales, which grew 54% in 2020 and closed the year at about 45% of total sales vs 25% at the end of last year. At over $6 bln, its online channel is ranked number two in US apparel e-commerce sales. In sum, Old Navy and Athleta have seen booming sales while Gap and BR continue to struggle. With a strong FY21 now in the books, it makes us question the company's January 2020 decision to not spin off Old Navy and let the stock achieve a higher multiple. We do not really see the benefit of keeping these brands together. Plus, Old Navy generates more annual sales ($7.5 bln) than Gap ($3.4 bln) and BR ($1.5 bln) combined. Maybe at least a name change is warranted. |