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Gap, Inc.
(GPS $18.00)
Christopher Letts, Kevin Smith,
and Brian Burnham
Tonight’s Objectives
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Overview of GAP Inc.
Industry Overview
Competition
Growth Prospects
Concerns
Recommendation
Company Overview
• Gap Inc. is one of the largest specialty retailers
in the world. Gap Inc. operates four well known
clothing brands.
– Gap, Banana Republic, Old Navy, Forth & Towne
– Founded in 1969 in San Francisco
– More than 3,000 Stores worldwide (2800 stores in the
U.S., 250 Stores in Europe, German, and Japan)
• Mission: Gap Inc. is a brand-builder. We create
emotional connections with customers around
the world through inspiring product design,
unique store experiences and compelling
marketing.
Company Overview
• Focus on continuing to expand market
– Forth and Towne brand introduced in 2004 targeting
women over the age of 35
• Focus on cost control
– Clothing is made through a 5 phase process
– Design and Merchandising,Planning and
Sourcing,Production and Marketing,Distribution,
Sales and Analysis
Company Overview
The Competition
• Large market of retail stores
• Abercrombie and Fitch; Limited; Express;
American Eagle, etc.
• Comparing Gap to the competition:
– Last month all retail sales were down. Gap
sales were down 3% however comparable
stores were down 6%
Industry Overview
Industry Overview
• Specialty Retail Stores
– Very large, Near saturation
• Retail stores are very abundant in the U.S.
market place and have experienced
slowing sales the past couple years
Growth Prospects
• Gap is currently at the lower end of its 52wk
range.
– Current Price around $18.00; Target Price $23.50
– Projected 10% range growth over next several
years
• Company has large cash balance
– Tremendous free cash flow provides the
company with flexibility regarding its strategic
long-term options and make the shares
compelling from a dividend, free cash flow and
balance sheet perspective.
Prospects (contd.)
• New line still unproven
– Fourth and Towne line just released targeting
baby boomer women, ages 35+, market untested
• Should have debt free balance sheet by
FY2008
• Long-term growth should be solid due to
expansion in international market
– Five new test stores and 2 Banana Republics
being opened in Tokyo
Prospects (contd.)
• Management attention to corporate
governance and social responsibility reduces
volatility
• Gap has continually expanded their brand
names and target demographics
– Gap, Baby Gap, Old Navy, Banana Republic,
Fourth and Townes
Negatives
• Higher Risk (beta 1.84)
• Operating in Saturated Market
– Needs meaningful growth to support shares
long term
• Rising interest rates have adversely affected
specialty apparel retailers
• Industry risks include: Fashion, markdowns
and inventory risk
Our Recommendation
• Recommendation: Buy
– New prospects with Forth and Towne and
more expansion in the international market
will help The Gap in their efforts to grow in a
fiercely competitive environment
– Gap’s balance sheet is saturated with cash
– Share price is well valued relative to peers
– Effective management will better position Gap
for future success and shareholder return