Gap (GPS) Signs JV With Next for a Comeback in UK Retail
Post all 81 store closures last year, Gap, Inc. GPS is back on the British retail space as part of its new joint venture (JV) with Next plc NXGPY. GPS launched its first new-generation shop-in-shop store inside Next’s largest store in Oxford Street. Per the partnership, Next will manage the Gap shops, while the Next Total platform will operate its e-commerce business. The move is an attempt by Gap to re-establish its store presence in the U.K.
In Next’s store, Gap is offering denim, khakis and logo products for women, men and kids, along with certain seasonal fashion items. Also, there will be a customization unit in the store, wherein customers can use embroidery, badges and monogramming. Other brands available in the store include womenswear brand Lipsy, stationery brand Paperchase, Costa Coffee and Sockshop.
Gap revealed plans to offer a click-and-collect service at several Next stores, free next-day delivery to Next and Gap stores, and some other customer service options in late 2022. Customers are likely to avail its summer collection on next.co.uk and gap.co.uk this year. The company is also expected to launch multiple shop-in-shops in the second half of 2022 across the U.K. and Ireland.
Here's What Else You Should Know
Gap has been gaining from strength in the core business due to restructuring efforts, including selling smaller non-strategic brands, transitioning to an asset-light partnership model, and shutting down underperforming North American stores. The company remains poised for long-term growth on the back of investments in demand generation, customer loyalty and artificial intelligence.
The robust performances of Old Navy and Athleta brands bode well. The Athleta brand’s values-driven active and lifestyle categories, increased digital marketing investments, and focus on product strategy have been aiding sales. In fourth-quarter fiscal 2021, net sales jumped 52% for the Athleta brand from the 2019 comparable period, while comps advanced 42%. Segmental results gained from a solid online show and growth in the wellness space, backed by the launch of AthletaWell.
Meanwhile, the Old Navy brand’s sales improved 2% from fourth-quarter fiscal 2019, while comps remained flat with the pre-pandemic levels. Strength in Active, Denim, and Kids and Baby categories remained the key growth driver. Strong demand for the loyalty program and the introduction of inclusive sizing via the BODEQUALITY launch also act as upsides.
The company has been witnessing continued growth in the online business, with digital sales increasing 44% from fourth-quarter fiscal 2019, accounting for 43% of total sales for the said quarter. The online business is benefiting from dominant omni-channel strength and scaled operations. Management remains keen on optimizing its mobile experience as a key priority. As a result, it launched its native Android app, which is gaining traction. It targets the e-commerce business to contribute 50% of sales by the end of 2023.
The Zacks Rank #3 (Hold) company is on track with the execution of its Power Plan 2023, which focuses on opening highly profitable Old Navy and Athleta stores, while closing the underperforming Gap and Banana Republic stores. As part of the plan, the company expects the Old Navy and Athleta brands to contribute about 70% of sales by 2023. With the closing of the underperforming Gap and Banana Republic stores, GPS expects to realize $100 million in EBITDA savings on an annualized basis by the end of 2023.
Driven by these factors, management issued the fiscal 2022 view, wherein it expects adjusted earnings of $1.85-$2.05. Sales are anticipated to grow year over year in the low-single digits. We note that the stock has plunged 12.7% in the past three months compared with the industry’s decline of 29%.
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However, the company is reeling under higher freight costs and supply-chain disruptions. This led to an adjusted gross margin contraction of 260 basis points (bps) from fourth-quarter fiscal 2019 due to a 500-bps decline in merchandise margins, stemming from higher air freight. The adjusted operating margin of 0.4% contracted 550 bps from fourth-quarter fiscal 2019. This includes the adverse impacts of roughly 600 bps related to transitory air freight expenses.
Higher investments in marketing and technology, as well as a rise in compensation and fulfillment costs, also remain concerning. Notably, adjusted operating expenses increased 6.3% to $1,507 million, while the adjusted operating expense rate of 33.3% expanded 300 bps from fourth-quarter fiscal 2019.
Stocks to Consider
Here are two better-ranked stocks to consider — Nordstrom JWN and Tapestry TPR.
Nordstrom presently sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 13.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Nordstrom’s current financial-year sales and EPS suggests growth of 5.7% and 180%, respectively, from the year-ago period’s reported numbers. JWN has an expected EPS growth rate of 6% for three-five years.
Tapestry presently has a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 28.2%, on average.
The Zacks Consensus Estimate for Tapestry’s current financial-year sales and EPS suggests growth of 17.5% and 22.9%, respectively, from the year-ago period’s reported numbers. TPR has an expected EPS growth rate of 12.5% for three-five years.
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