Retail

Minding The Gap, Joining The (Old) Navy

It’s been said that in the stock market, equities are both voting machines and weighing machines. Popularity comes fast and furious, then long-term holders assess long-term prospects and, perhaps, park significant amounts of capital with them.

According to reports from Forbes, one company that has seen at least some boost in stock market sentiment is Gap Inc., where a movement is occurring to bring the retailer into a new place of growth. The strategy entails getting the company out of its dependence on malls, and moving toward a boost of its more profitable retail units.

Gap Inc. is the parent company of several lifestyle retail brands including Athleta, Banana Republic, Gap, INTERMIX, Old Navy and Weddington Way, brands which are seeing varying degrees of current retail sales success.

The flagship Gap unit, according to Forbes, is marked by scale and a bit of maturity. Yes, Gap has been around a while — since 1969, in fact. The “Fall into the Gap” jingle, remember? Oh, and remember disco? All are from the same era.

As of late, the company’s portfolio has been shaped by roughly 200 Gap and Banana Republic brick-and-mortar stores being shuttered in malls — retail centers where teens once gathered, but where dust now gathers instead. And, where there is a lack of notable foot traffic, there is also a lot of inertia. This is evident in the Gap brand side of the business, a branch of Gap Inc. which has seen four straight years of declining sales. Hot on those cooling heels is Banana Republic, marked by three years of negative comps.

The 200 stores slashed by Gap’s new strategic direction brings the total Gap Inc. closed locations to 650 in the past 12 years, a small number when held against the larger backdrop of thousands of brick-and-mortar stores closing across retailers in general.

But, might Old Navy and Athleta be the best of the Gap brands lot? Forbes noted the brands get the “fashion sensibility” nod from younger consumers while also packing a punch with affordability. Thus, Gap management has said Old Navy will boost its sales from $7 billion to a $10 billion run rate, to be joined at the $1 billion level by Athleta. Old Navy was buoyed by mid-single-digit percentage sales growth as reported in the latest quarter.

It should be noted that while physical retail footprints have deteriorated, these two units will see a 270 store boost in 2017 alone. Look for a sanguine trend to develop for Gap, said Forbes, moving past the discounting days of yore while targeting the younger shoppers.

The weighing machine may be kicking in, as retail stocks have grown from $21 to $28 in just a few short months. Yet, might investors still be lured by yield at 3 percent? Perhaps. Realignment has also boosted sentiment, though not so much that retail shares look frothy. The multiple is in the low teens, even after an August earnings report that sent the stock up significantly. This implies a growing E denominator in the PE ratio.

That’s precisely what investors like to see.

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