Is Gap Too Far Gone?
the once-iconic apparel company Gap and its value-tier brand, Old Navy, are seemingly fading into irrelevance. Can anything—or anyone—come to the rescue?
After Old Navy’s head departed in April, the company said Monday that Sonia Syngal, its chief executive officer, was stepping down. The already-battered stock has fallen about 5% since the announcement. Gap, in addition, telegraphed a worsened margin forecast for the current quarter, reflecting heavy discounts to manage its pile of excess inventory.
Gap is now valued at 0.19 times expected next-12-month sales, the lowest level on record excluding the severe dip seen in 2020. Such a low valuation clearly makes all options—such as potential spinoffs or a sale—look better than nothing.
While a spinoff of Old Navy looks unpalatable, a sale or spinoff of the faster-growing Athleta might be a possibility. If Athleta could fetch a price-to-forward sales multiple that is even half of Lululemon’s, its own market capitalization would surpass that of its parent company. Athleta’s revenue is expected to increase at a compound annual growth rate of 9.8% over the next five years, according to estimates polled by Visible Alpha. That is not a shabby number compared with Lululemon’s expected 14.8% growth rate.
Victoria’s Secret, which turned customers away with its out-of-touch brand image, seems to be turning a corner after taking up more-inclusive messaging and reducing its footprint. The brand operates 28% fewer U.S. stores than it did six years ago. Similarly, Ralph Lauren is a much more profitable business today after the company culled the number of items sold and reduced the number of its stores. Though stock prices and valuations have improved for Abercrombie & Fitch and Ralph Lauren since their respective downturns, they aren’t where they used to be.
One problem for Gap is that the company has already used up some of its downsizing ammunition—with little success. The Gap brand in particular has reduced the number of its stores since 2018, but same-store sales have still declined or looked anemic.
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