The Gap is Back
Elizabeth is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’ll admit it -- I was on edge before the second-quarter earnings release of Gap Inc. (NYSE: GPS) hit the public on Aug. 16. Sure, I wanted the largest specialty retailer in the United States to pull through with solid margins and profit figures, but between closed stores, failed advertising campaigns, and the firing of head designer Patrick Robinson in May 2011 to top it all off, a fair share of pessimism was certainly warranted.
With its stock price spiking more than 109% since August 2011, Gap was the fourth-highest grower in the Dow Jones over the past year; could it maintain its impressive growth and continue to excite investors, I wondered, or would it simply disappoint and drop back down to its uninspiring pre-2012 performance?
To my pleasant surprise (but not quite my shock), Gap’s quarterly profit skyrocketed 29%, earning 49 cents per share with $243 million in net income, up from 35 cents per share and $189 million in 2011, and beating analyst expectations of 48 cents per share. Not bad, especially considering the 2% drop in square footage since August 2011 and further plans to decrease retail space 1% by the end of fiscal 2012.
Increased revenue alongside downsized square footage seems counterintuitive, but the logic is actually quite simple: Gap is allocating resources more effectively and increasing its overall efficiency. It doesn’t matter how many millions or billions of square feet your company owns if you can’t produce the sales and profit figures to justify such a monstrous presence. Remember Borders? With individual store sizes ranging from 10,000 to 40,218 square feet per store, for a total of almost 859 million square feet, locations were so large that weak sales figures could no longer support its massive retail space, and the business imploded. Bigger isn’t always better, and Gap’s caught on.
Of course, Gap has still got a lot of progress to make. Comparable sales were up 4 percent for the overall company, breaking down into 7 percent each for Gap and Banana Republic of North America, 3 percent for Old Navy of North America, and negative five percent for international sales. First and foremost, Gap needs to revamp and fine-tune its international presence. Gap’s casual American, T-shirt-and-jeans styling may work wonders in the US, but abroad, perhaps the more tailored appearance of Banana Republic business-casual attire may be more appropriate. It’s up to the company to research the retail demands of each country and region it sells in and then to incorporate these research results into the options presented to international consumers.
Secondly, right here in the US, Gap needs to focus. Urban Outfitters (NASDAQ: URBN) perfects the model of esotericism with a clear knowledge of its target demographic and persistently successful efforts to cater exclusively to its beloved hipsters. Gap needs to take a few cues, both from its widely differing comp sales figures and from the successes of Urban and similar demographic-targeting companies.
While Gap’s definitely taken a step in the right direction by focusing marketing and design efforts on high-quality denim for its namesake store and sleek suiting for its Banana Republic line, Old Navy remains a hot mess, and the figures show it. If I need undergarments, I go to Victoria’s Secret [owned by Limited Brands Inc.]; if I want an ugly sweater, I head over to Urban; now I know that if my jeans all shrink in the wash one day, Gap will come to my rescue. When do you go to Old Navy? When you need hoodies? Shorts? Yoga gear? For that matter, who goes to Old Navy? Adults? Teens? Kids? The “value store of the Gap trio” reputation isn’t enough -- we have Wal-Mart Store Inc. (NYSE: WMT) if we’re just after low pricing. Customers are confused, and so am I.
Gap, pick a specialty for your teetering Old Navy brand if you want to maintain or even increase your thus-far spectacular growth. Do you have the hippest kid clothing in town? Research, produce awesome light-up sneakers and tutu-style skirts, and drop your extraneous junior and adult lines. Softest pajamas to ever grace the retail world? Go with that, but get rid of the casual day wear. Gym wear? It doesn’t really matter, as long as customers enjoy the products and they sell; what does matter is establishing the Old Navy line as a unique force in the retail market.
With remodeled and revamped retail spaces, eye-popping new fashions, a sleeker business model, skyrocketing sales and revenues, and stock prices at a ten-year high of $35.99, Gap’s made a full-on recovery from its May 2012 pessimism. Is the newly crowned king of denim here to stay? Maybe -- if the company can research, focus, and respond to the needs of both long-time loyal and newly arriving customers.
LizPowers has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.