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Gap's growth strategy relies on far fewer stores and a higher profile for Athleta

Tonya Garcia

Gap Inc. (GPS), the largest apparel company in the U.S., used its 2020 investor day to lay out a strategy for growth, a plan that will rely heavily on Gap and Banana Republic store closures and the Athleta brand.

Even before the Thursday investor day event, Gap had begun the process of shuttering parts of its massive footprint.

Now the company says it will close 350 Gap and Banana Republic stores in North America between fiscal 2019 and fiscal 2023. That will leave 870 at the end of fiscal 2023, 30% fewer than there were less than a year ago.

Many of the closures will come as leases expire, and the company will use the closures to move away from malls, many of which had been struggling even before the coronavirus pandemic.

Gap anticipates that by 2023, 80% of its stores will be outside of malls. The company expects to pay $45 million less in rent annually for the stores that will continue.

See:Retailers are shutting stores amid COVID-19 but could be getting stronger in the process, says BMO (link)

Gap also operates an e-commerce business for its namesake brand in Europe as well as 120 Gap stores in the U.K., France, Ireland and Italy. The specialty retailer is considering a transition to a partnership and franchise model by the end of Q2 2021.

The strategy, which the company is calling Power Plan 2023, also includes a higher profile for the growing Athleta brand. Athleta is currently a $1 billion brand; Gap's goal is to grow it to a $2 billion by 2023.

By that year, the company expects Old Navy and Athleta to ring up 70% of net sales, compared with 55% today. These two brands will add stores, with Old Navy heading to smaller markets with populations of less than 200,000.

The event sent shares soaring 13.7% in Thursday trading. Gap stock has gained nearly 20% for the year to date, outpacing the benchmark S&P 500 index , which is up 7% for the period.

Also: Average holiday spend per U.S. household expected to drop 7%, Deloitte says (link)

"We think the company is on the right direction, but is still saddled with Gap and Banana Republic, brands that are expected to generate over $6 billion in revenues by 2023... down from over $7 billion in 2019, but with hundreds of fewer stores," wrote KeyBanc Capital Markets analyst Matthew DeGulis in a note.

"While this is certainly possible, we think the brand messaging of Gap and Banana Republic remains unclear."

KeyBanc rates Gap stock sector weight.

Gap generated $16 billion in sales in 2019 with an almost $200 billion addressable market, said Katrina O'Connell, Gap's chief financial officer, who spoke during the event, according to a FactSet transcript.

"In our view, Gap Inc. would be rewarded if Gap just went away -- it would be clean," said MKM Partners in a note.

"However, in light of recently improved performance, driven by a greater focus on key categories, aggressive store closings, and leaner inventory, there is some evidence of relevancy. We are more convinced downsizing (and going off-mall) is thus the better answer, and will allow Gap Inc. to maintain scale advantages it enjoys across its portfolio, particularly in real-estate and supply chain."

MKM rates Gap stock neutral with a $22 price target, up from $19.

UBS analysts aren't confident Gap Inc. can reach its financial goals, in part because specialty apparel companies will still face long-term challenges even if there has been some good news during the pandemic.

"We think Gap Inc.'s plan assumes Gap brand and Banana Republic stabilize," analysts led by Jay Sole wrote. "To reach 3% annual growth... Athleta would have to grow 15% annually, Old Navy 2% and both Gap and Banana Republic would need to be flat. We note Gap brand revenue has declined every year since 2013."

UBS rates gap stock neutral with a $17 price target.

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GlobalData analysts also say that the company's plan for Europe faces the hurdle of relevancy.

"As one of America's most iconic retailers, Gap could formerly rely on the luster of its American name to establish international prestige," analysts said.

"But its cultural legacy no longer holds weight for European consumers, who have lost interest in Gap's uninspiring apparel. Given that European consumers have no patriotic allegiance to shop with the brand, Gap's inability to remain relevant has resulted in a significant decline, and it has lost the market share it had once carved out in Europe."

BMO Capital Markets says "Old Navy performance is paramount." BMO rates Gap stock market perform with a $19 price target, up from $16.

Watch:Why retail bankruptcies won't necessarily create a 'retail apocalypse' (link)

MKM sees continued growth in Old Navy's active wear and kids, two core categories, with other measures like a new loyalty program and new stores, driving $2 billion in incremental sales.

"[I]t's important to acknowledge that we've not had great execution in recent years and we look forward to delivering different results through the execution of our Power Plan 2023," said Gap's O'Donnell during the event.

-Tonya Garcia; 415-439-6400; AskNewswires@dowjones.com

 

(END) Dow Jones Newswires

10-24-20 0922ET

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