Wednesday 21 August 2019

John Lynch: Gap shows retailing can be a fashion whim

John Lynch

This Christmas it's been a bit sad going into Dublin city to see that so many of the great names of Irish retailing have vanished.

Clerys was so much a part of the season for Dublin kids and children from the country. It's shameful closure has taken so much glamour from Main Street, Ireland (as O'Connell Street once liked to be known).

The iconic Boyers department store also has the shutters down while Guineys is another gloomy reminder of how city trading has changed. In addition, the old tradition of heavily-padded Santa's handing out parcels in shops like Switzers, Clerys and McBirneys is now just part of 'rare auld times' nostalgia. But there are useful lessons in all this.

Retailing fashions change almost as fast as the products being sold. The size of a chain does not make it immune to fashion whims. I'm looking at the US-owned Gap group today which has undoubted scale but also a problem about whether it can keep growing.

Gap is the largest apparel retailer in the US and the third largest in the world lagging behind Spain's Inditex (Zara) and Sweden's H&M. It employs 140,000 worldwide in 43 countries, has over 3,700 stores and is listed on the New York Stock Exchange.

A specialty retailer, it sells casual clothes, accessories and personal care products. The group operates its business through the Gap, Banana Republic, Old Navy and Athleta retail chains. The company has its own stores in the US, Canada, China and Hong Kong. It also has franchise operations in Australia, Asia, Latin America and parts of Europe. In spite of its global footprint, the US and Canada accounts for 80pc of total sales. The company's business model is to design its products in-house and sell under its branded names.

The Gap brand concentrates on casual clothing, including the latest trends. Its product range includes clothing for babies, children and maternity and male and female. The brand generated revenues of $5.7bn (€5.45bn) last year, down 7pc from its 1,350 stores worldwide of which its 870 US stores contributed $3.3bn.

The Banana Republic brand was acquired in 1983.

It delivers modern styles and presents a sophisticated image. In addition to selling apparel it also markets jewellery, eye wear, handbags and shoes. Banana Republic is the smallest brand in the group with sales of $2.7bn, down 10pc, of which US stores contributed $2.2bn of sales.

Old Navy is a brand developed in 1994 by the company as a value chain. The brand offers trendy clothing and accessories for men and women and the younger customer, having in excess of 1,000 stores and sales of $6.6bn, with the US accounting for $6bn.

The environment for selling clothes is challenging. This shows in Gap's decline of sales, profits, earnings per share and free cash flow over the past four years. Net sales last year at $15.7bn and net profits at $920m were the lowest in the last four years. Operating margins have fallen consistently and free cash flow declined from $1.4bn to $870m.

Gap's share mirrors its trading volatility. From late 2013, the shares traded in the $40s peaking at $48 in 2014. Since then they have been heading south, bottoming out at $17 early this year. Today they trade at around $25 but confidence has been shaken with an exit from Japan, and its plans to close Banana Republic stores in the UK.

Investors, however, have not been ignored as dividends have increased 5pc to 92c. In addition the group is spending in excess of $300m on share repurchases. The share has a modest price to earnings multiple of 12.5; valuing Gap Inc at $10bn.

In the past few years the group has dumped a number of CEOs and hired Goldman Sachs to explore a strategic alternative (which is usually a 'for sale' sign), but so far nothing significantly has occurred. It could benefit from president-elect Donald Trump's 'America first policy' but then again its sources the majority of its products from Asia. The consensus view is that the group will continue to struggle for a while yet.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

Also in Business