Morningstar | Productivity Efforts Drive Modest Customer Engagement at Gap; Shares Fairly Valued
As no-moat Gap has pivoted its brand-building efforts toward segments that resonate with consumers (Old Navy and Athleta), the firm has been able to bolt on its seventh consecutive quarter of comp-store sales gains (at 2%). However, while Old Navy (48% of total sales) has linked together nine quarters of positive same-store comp growth, Gap (30% of sales) has continued to languish, with only one of the last eight quarters delivering a comp-store increase. Despite comps that were 2% better than our forecast at both Banana Republic (2%) and Old Navy (5%), we don't plan any change to our back-half comp outlook, as the firm has maintained its flat to slightly up comp outlook for 2018, which is near our 1% estimate. Furthermore, with reiterated 2018 earnings per share guidance of $2.55-$2.70 (versus our $2.61 outlook) despite the slight outperformance, sales and EPS growth could slow modestly from their second-quarter cadence, supporting our thesis that competition remains robust, although Gap is lapping high-single-digit revenue growth in the final quarter of 2017. We plan to maintain our $33 fair value estimate and view the shares as fairly valued.We think Gap will continue to lose share to fast-fashion and off-price peers, with no clear execution on a plan to stave off losses we are currently seeing in key segments (Old Navy and Banana Republic continue to grow slower than the clothing and accessories market). As a result, we model same-store sales to be 1% on average annually over the next five years, below our expectation for 3% average annual retail sales growth. Given plans to offset the closure of Gap and Banana Republic specialty stores over the next few years with the opening of Old Navy, Athleta, and value-oriented stores, we see store growth as roughly flat over the next five years. With cost savings and improved inventory levels (likely leading to lower discount levels), we see operating margin stabilizing around 9%, in line with fiscal 2017 levels.
The Gap is an apparel retail company. The company provides apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, Athleta, Intermix, and Hill City brands. The company has stores in the U.S., Canada, the U.K., France, Ireland, Japan, Italy, China, Hong Kong, Taiwan, and Mexico, and has franchise agreements with unaffiliated franchisees to operate Old Navy, Gap, and Banana Republic stores throughout Asia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate stores that sell apparel and related products under the company's brand names.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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