Gap: Dressed to Thrill Investors?
By Diane Brady
For investors who have been debating whether to slip back into Gap Inc. (GPS ), October was a critical month. Not only have holiday fashions been flowing into its Gap, Old Navy, and Banana Republic stores, but October sales could be an important sign of things to come. Results for the month are slated to be reported Nov. 6.
October also marks the first time that same-store sales under new management will be compared against a year-earlier period that wasn't miserable, making it tougher to show improved growth. And with one year at the helm, new CEO Paul Pressler's full impact is finally starting to be felt.
Under Pressler, a veteran of Walt Disney (DIS ), Gap has moved away from the whimsical though often inspired tastes of former CEO Millard S. "Mickey" Drexler. Instead, it has kept a sharper focus on cutting costs, consumer research, and more targeted marketing of the three brands. That includes Gap commercials featuring Italian actor Raoul Bova strutting around shirtless in little more than his "broken-in" jeans and actress Fran Drescher getting excited over Old Navy's painter pants.
So far, some signs of a renaissance have emerged. Gap's same-store sales increased 13% in September, compared with a 2% decline the year before. After a season of dull and somewhat derivative clothes, more color and inspiration seem to be seeping onto the shelves. Moreover, the three chains are finally forging unique identities: Banana Republic has more luxurious fabrics and sophisticated styling, Gap is clearly the place for basics and a touch of trendiness, and Old Navy is playing up its reputation for cheap but fun family gear.
However, that may not mean it's time to go racing back into the stock. For one, Gap shares have already had a run-up because of the improved results it has been posting so far in 2003. The stock price is hovering at around $18.70, less than the $19.77 it hit earlier in October but more than double the level it sank to in October a year ago.
Howard Tubin, a retail analyst at Cathay Financial, thinks it's fully valued at this level. He's not yet convinced that September's numbers are sustainable. Not only did a number of retailers post better sales that month, thanks to cooler weather and an improving economy, but Gap's lackluster sales growth in August was a big disappointment. And Tubin, for one, isn't terribly inspired by what he sees in Gap stores. "I still think it's too skewed toward fashion basics," he says. "It's tough to be a mall-based retailer and not distinguish yourself with fashion."
FROM NEWBORNS TO GREYBEARDS.
Several analysts argue that the $6.8 billion Gap chain remains the biggest question mark for its $14.5 billion parent. It boasts more stores than either Banana Republic or Old Navy and remains the highest-profile brand. While sales at U.S. Gap stores were up a respectable 13% in September, vs. a 3% decline a year earlier, many still wonder whether it has a sufficiently innovative product mix to keep customers coming back during the critical Christmas season.
As Pressler knows all too well, that's no easy task for a chain that has to appeal to a broad customer base. Not only is Gap a mature brand that's widely regarded as too big at this point, it has to find ways to be the clothing retailer of choice for everyone from newborns to middle-aged men. While Pressler is doing more consumer research and segmentation in marketing, getting sustained growth could be tough -- especially in a year when the overall group's square footage is set to actually shrink 2% through store closures.
Still, even pessimists say they're not writing Gap off. Veteran retail consultant Howard Davidowitz, who recently dismissed the chain's fall line as "boring" says he thinks Gap remains a powerful brand. "If they get the right product, the consumer will come back."
Harry A. Ikenson, a specialty retail analyst at First Albany, thinks the conditions for a further upswing are already in place. He thinks the stock could rise to $24 if sales continue to do well. Having recently toured several stores on his own, Ikenson is pleased with the quality and look of what he has seen. If same-store sales prove to be strong for this holiday season, he says, "investors likely will be excited about the company again."
Maybe so. Gap is expected to post an 81% earnings gain this year, to 98 cents a share, according to the consensus estimate of analysts polled by Thomson First Call. And those October sales figures, to be reported Nov. 6, will be judged against a year earlier, when sales were already up 11% from 2001. If Pressler can deliver the numbers then, he may well find more investors lining up at the till.
Brady is an associate editor for BusinessWeek in New York
Edited by Beth Belton