Note: A version of this piece originally ran on MarketWatch.Investors are in love with GAP Inc. this holiday season, and it’s easy to see why.
After all, 2012 numbers have screamed “turnaround success” for the former-retail darling. Sartorially, for the fist time since defining “khaki culture” of the ’90s, GAP seemingly found its fashion groove again this year, hitting the coveted female consumer’s (25-40) sweet spot with a trendy warm-weather line that featured items (i.e. brightly-coloured, thin-fabric capri pants) of which women couldn’t seem to get enough.
Meanwhile, September 2012 brought with it excellent revenue news. With same-store sales increasing 6%, the month led into a successful October. With GAP reporting a 4% pop of same-store sales % last month, topped off a successful 3rd quarter for the retailer, with total net sales increasing 5.6% overall.
All this news, then, combines to make GAP appear to be the “feel-good retail turnaround story of the year,” with the company’s stock price confirming popular sentiment: since last September, GAP’s stock price has more than doubled (moving from approximately $16/share to approximately $35 as of today).
Despite all this good news, however, this retail season will soon demonstrate this retail emperor has no clothes.
1. One Successful Season Does Not A Turnaround Make: Positive press and a jump in stock value for GAP really started around March of this year, when the retailer stumbled upon its first successful spring line in years. A successful product line, combined with one of the warmest Spring/Summer/Autumn blended-seasons in history, meant an unexpected and prolonged increase in revenue for the retailer in 2012 What most failed to realise or note, however, is that little has changed strategy-wise for GAP in recent years.
2. Expansion: Right Strategy, Wrong Time: Markets cheered when GAP Inc. executives recently announced plans for expansion of its 3 core brands – Banana Republic, Old Navy, and GAP – into China in 2013. Much like the brand’s push into Europe just as the continent was teetering (and continues to do) on the brink of economic collapse, GAP’s timing could hardly be worse. Political unrest, demographic issues, and a stalled global economy (plus the fact that the country has experienced a 30% decrease in demand for durable goods this year) indicate that China sits on the precipice of if not an economic contraction, then at least a stalled economy. Just as GAP seeks its Yuan, China’s middle class will most likely have far less to spend next year on the brand’s casual chic clothing.
3. Competition: Having lost its way in the 2000’s, GAP found itself listing about, having lost its market-share to the superiorly-run JCREW, rapidly-growing fast-fashion giants H&M and Forever 21, and, most recently, the uber-trendy Uniqlo. While fast fashion giants continue to siphon off GAP’s market share, it’s the growing up-and-comers (i.e. Uniqlo) who most threaten the retailer. In fact, Uniqlo recently launched an easily-accessible and highly-popular website in the US featuring the brand’s trendy yet moderately-priced clothing just in time for the holiday season. This move proves that the Japanese behemoth is now set on publicly and openly gunning for GAP’s core consumer base both now and in 2013.
4. Holiday Sales Are Not Enough: Finally, GAP, like most retailers, is looking to the holiday season to make up for a sluggish half-decade. With experts predicting a middling 3% increase in US-chain store sales this year, GAP’s reliance on seasonal spending both belies the retailers struggle for growth and profitability and its dependence upon one-time sales boosts (as opposed to a coherent strategy) to steady – as oppose to enhance – the brand’s performance.
So, given all the optimistic ink spilled this year by reporters and analysts alike about the GAP, what’s an investor to think? Make no mistake: regardless of a seemingly successful 2012, GAP Inc. is (most likely) headed for trouble in 2013. Limited growth potential, combined with a confused and mistimed expansion strategy and a dependence on “one-season” popular items/ holiday sales, means GAP Inc. will almost definitely experience a sluggish, retrenching year in 2013.
Perhaps most importantly—on the macro-strategy side, anyway—until the retailer fully-commits to a comprehensive turnaround plan (and finally sells/spins off the (underperforming) Old Navy brand, thereby allowing the GAP brand “breathing room” under Banana Republic), investors should be wary of long-term growth and profitability prospects for GAP Inc. After all, this is a brand for which simple momentum has contributed more to its “success” and survival in the past decade than much else.
In short, don’t call 2012 a comeback. GAP’s struggles have been here for years. And will continue to be so for many more.
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