Mind the Gap

Source: CNBC.com.

You should mind the gap, not the one while taking the train but the GAP. The fashion retailer’s share price just dropped 20% in one day after reporting a flat quarterly sales.

What’s going on here? Gap’s third quarter sales rebounded from the spring but still fell short of Wall Street’s estimation. Its brand Old Navy and Athleta performed well while Gap and Banana Republic struggled.

  • Something positive: Though sales at physical stores declined 20% YoY, its online sales rose 61% YoY.

A new strategy will be adopted by Gap following its new CEO Sonia Syngal’s take over in March - focusing on its online operations and high growth brands.

  • It will say “bye bye” to shopping malls by gradually closing stores. Gap expects to have 80% of revenues from non-shopping mall channels by 2023.
  • Brand wise, higher-margin brands like Old Navy and Athleta will be more focused while older lifestyle brands Gap and Banana Republic will be gradually transformed into “affordable luxury”.

Looking ahead...Gap remains optimistic about the upcoming holiday quarter. With nowhere to go, Gap expects consumers to spend their pocket money somewhere else, like shopping. Thanksgiving, Double 11, Black Friday and Christmas - all excellent shopping time!

Did investors over-react? They lost confidence after seeing another wave of the Covid globally. Considering the 350k addition per day, the business seems not to be able to recover that fast.

  • Meanwhile, Gap has gained more than 50% YTD, with an overall market cap more than USD 10 bln. Maybe it is too expensive given the sluggish outlook?

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