Even before the onset of the pandemic, you didn’t want to put your money in companies that relied heavily on
mall traffic.
Now? Fuh-get-about-it.
While other brick-and-mortar retailers have languished – or filed for bankruptcy – Gap (NYSE: GPS), however, is trading above pre-pandemic levels.
The second quarter was not kind to Gap’s store sales; Old Navy dipped 36%, Gap decreased 55%, and Banana Republic was down 71%. Even Athleta, the popular women's athleisure brand, saw in-store sales drop 45%.
But Gap’s overall sales were down just 18%. Digital was – unsurprisingly – responsible for the more tolerable overall decrease.
3.5 Million New Online Customers
Overall, Gap added 3.5 million new online customers in Q2, a 165% yoy increase. The online sales increases across brands were as follows: Old Navy was up 136%, Gap increased 75%, Athleta rose 74%, and Banana Republic jumped 26%.
The online sales increases were higher, on a percentage basis, than the in-store sales decreases, but overall sales were down because in-store comprises a higher percentage of Gap’s revenue.
But, still… This quarter could have been a lot worse.
And instead of resting on its laurels, Gap decided to add PayPal (NASDAQ: PYPL) and Afterpay to bolster its online payment capabilities.
Athleta Continues to Shine
Athleta’s overall revenue actually increased 6% in Q2, as its smaller physical presence allowed its 74% e-commerce increase to more than offset its 45% in-store decrease.
The women’s brand has taken a values-driven approach, which has really hit home with its target market. Of course, as an athleisure brand, it has also been aided by the shift to work-at-home.
But work-at-home has put a dent in one of Gap’s other brands.
Banana Republic Continues to Struggle
As you may have noticed, Banana Republic recorded the biggest in-store decrease, and the smallest e-commerce increase among Gap brands.
Banana Republic was struggling even before the pandemic. Now, as a seller of workwear, things have gone from bad to worse.
Gap is aware of this, and on the Q2 earnings call, said that, “We currently expect to close over 225 Gap and Banana Republic stores globally on a net basis in 2020, ahead of our previous expectations with line of sight to additional store closures in 2021.”
The hope is that the Banana Republic stores that stay open can carve out a smaller niche. I wouldn’t hold my breath, but fortunately Gap’s other brands are picking up the slack.
Gap is Lowering Expenses
Gap’s SG&A expense decreased by around $200 million in Q2, with store closures contributing to the decrease. With that said, in-store safety investments were, unsurprisingly, higher.
But overall, SG&A was up just 110 basis points yoy as a percentage of sales, to 32.9%. I consider that a win with revenue decreasing as much as it did.
Gap may never experience rapid revenue growth again. But post-pandemic, we can realistically see a leaner and meaner Gap with moderate revenue growth. At its current multiple of .51x forward sales, shares could have solid upside from here.
Short to Intermediate-Term Outlook is Solid
Last week, the Census Bureau reported that retail sales increased 1.9% in September, marking the fifth straight monthly increase. Clothing sales were one of the big winners, as they increased 11% with back-to-school and the upcoming cooler weather acting as catalysts.
Gap almost certainly got a nice piece of the pie, and we could see an upside surprise when it reports its Q3 earnings next month.
Looking to 2021, Gap’s connection with Kanye West could really pay off; some believe Yeezy Gap, set to launch in the first half of 2021, could be worth as much as $8 per share to Gap. A $2-5 per-share value is more realistic, but would still be a boon for a company trading at under $20 a share.
The Final Word
CEO Sonia Syngal took over in March 2020, and what I like is that she’s simply investing into Gap’s strong brands and deemphasizing the struggling ones.
Athleta and Old Navy have been the strong performers, while Banana Republic and the flagship Gap brand have disappointed. Banana Republic and Gap brand still have their places in Gap’s business, but as I alluded to earlier, they are going to be a smaller piece of the pie moving forward.
Bottom line, Gap is one of the few apparel retailers that is worth investing in – the company simply gets it in an industry where too many don't
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