Gap Inc updates
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Gap is stitching together a turnround. The retailer, which has lost market share to lower price fashion brands in recent years, just delivered its highest second-quarter sales in a decade. After more than a year of being stuck indoors, shoppers are on the hunt for a new wardrobe.
Yet the investors who lifted Gap’s share price on Friday should not get too comfortable. The company’s comeback plans could still come apart at the seams.
Second-quarter net sales of $4.2bn — up 29 per cent versus last year and 5 per cent higher than 2019 pre-Covid levels — are eye-catching. But the bulk was driven by the value brand Old Navy and the athleisure label Athleta. Both have been a bright spot amid the broader shift to cheaper, more casual clothing.
Gap’s main challenge remains fixing its namesake brand and luring customers back to Banana Republic, its work-focused apparel business.
A move to close hundreds of underperforming stores, cut the number of items and adopt a more nimble supply chain has helped. A Gap tie-up with the rapper Kanye West’s Yeezy brand has created buzz too. Yet like-for-like sales across the two remain below pre-Covid levels.
Part of the problem are price points. Being a mid-tier clothing brand is a tough spot to be. The space is squeezed by cheaper fast fashion chains at one end and premium brands at the other.
Gap’s valuation reflects how far it still has to go. Although the stock is up almost 400 per cent from its April 2020 lows, it trades at just 13 times forward earnings. That compares to 38 times for Japan’s Fast Retailing, which owns Uniqlo, and 56 times for the luxury yoga pants maker Lululemon.
The decision to bump up full-year sales and earnings guidance shows confidence that sales will continue to rise. But headline figures tell only part of the story. Investors need more proof that improvements in Gap’s flagship brand are not limited to a one season special.