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. The missteps under Ms. Syngal’s tenure—poor supply-chain management and declines at Old Navy—were especially surprising given her record of success managing both when she helmed Old Navy until 2020. “Gap had a very bad year in 2021, which was kind of the best year for retailers in modern history,” said Paul Lejuez, equity analyst at Citigroup. “Half of my retail universe had record margins last year, but Gap really struggled.”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%There are caveats here, though. Michael Binetti, equity analyst at Credit Suisse, said separation would come at a steep cost given how integrated Gap’s brands are, including their supply-chain, warehousing and IT systems. Gap is in poor shape to take on those costs. Its cash balance hasn’t been this low since 2001, and its net debt burden is 6.6 times its trailing 12-month earnings before interest, taxes, depreciation and amortization, according to FactSet. A basket of apparel-company peers has an average ratio of 1.9 times.While a fresh set of eyes could help Gap pull off an organic turnaround, successful ones are rare, according to retail equity analysts. Such efforts typically involve a reduction of stock-keeping units, or the number of items the company sells, a focus mainly on the products that sell well year after year, and cutting off less-profitable distribution, Mr. Binetti said.growth rate. Abercrombie & Fitch, which took its “cool kids only” exclusionary brand image too far under then-CEO Mike Jeffries, recovered its margins and sales growth after an image overhaul led by its chief merchandising officer, Fran Horowitz, who in 2017 assumed the CEO role. The effort involved sharp cuts. As of last fiscal year, its number of stores was about 28% smaller, and its revenue 18% below what it was in 2012.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. While Victoria’s Secret and Abercrombie & Fitch had clear branding problems, at least their names were eliciting some conversation, and inclusive messaging worked wonders for both of those brands, Neither Gap nor Old Navy has an easily diagnosable brand problem. Rather, they lack brand identity altogether.Ms. Syngal frequently said that Gap stands for American optimism. Nothing would be more on-brand than a true pulling itself up by its bootstraps turnaround, but that doesn’t make it a sure thing.For more info visit https://stockxpo.com/is-gap-too-far-gone/