Gap Inc.’s key competitive advantages lie in its structural advantages and leadership in retail across a vast variety of demographics as well as its management and operational advantages.
Brand portfolio and trademarks: Gap Inc.’s brands can be disaggregated into two distinct categories: tried and true household names (Gap, Old Navy, and Banana Republic) and newer high-quality brands to compete with up and coming trends (Athleta and Intermix). With most of its brands, Gap Inc. has full operational control. The exception is Intermix, for which Gap controls all aspects of brand development other than product design related to third party products. Gap is known to exhibit ultimate flexibility when it comes to managing its brand and was willing to shutter its Piperlime line (mix of private label and branded apparel and accessories) when it saw that this e-commerce focused line has become a drag on its performance. Its mix of brands gives it a competitive moat by targeting different price levels and apparel styles. In general, Gap Inc. is seen as both high quality and affordable, straddling the dual advantage zone. It has an established brand name which allows it to command a price premium and take wallet share from consumers.
Omnichannel: Gap Inc. maintains flexibility in its operations through its omnichannel management. Currently, Gap Inc.’s brands have retail stores that sell its own goods through both company-owned and franchise stores. Its ownership of majority of stores (88% as of Jan. 2016) allows Gap Inc. to maintain control over the inventory management, feel, and aesthetic of stores in its core geography of North America. Selectively, GPS is exploring and expanding across other geographies through franchising affiliates in Asia, Australia, Europe, Latin America, Middle East, which gives it an edge in local international markets. As Zara has shown in its local store front customization, adhering to local tastes is critical in apparel.
Gap Inc. is effectively able to price segment its customer base through its separate brands as well as through its retail vs. outlet stores. Selling through its own stores also affords GPS real-time monitoring of its inventory and feedback collection of data on its classic as well as trendier items.
Scale: As of fiscal year 2015, Gap Inc. operated 3,721 brick-and-mortar stores across six continents. Gap Inc.’s vendors number over 1,000 in over 40 countries, and vendors do not have significant supplier power, because the top 2 were only 5% of purchases by dollar volume. Twenty-four percent of purchases were from factories in China. Gap is a major employer of 141,000 employees worldwide (as of Jan. 30, 2016) and its large base allows it to cherry pick and train top talent across functions. Furthermore, its scale is an advantage in this uncertain climate for apparel retail because it allows Gap’s brands experiment without giving up too much brand identity.
Valuation
Gap Inc. is currently undervalued at $24.10/share, representing a $9.64B market capitalization (as of Mar. 17, 2017 market close). This represents a 14x P/E ratio, which is on the low end of its peers (including RL, AEO, ANF, PLCE, EXPR, and GES). Gap Inc. has a more favorable earnings profile and future prospects, so a fair valuation range is closer to 15x – 20x, which represents a price range of $25.35 - $33.80. The midpoint price of $29.58 is more reflective of where GPS should trade given its competitive advantages vs. peers and its potential over the near future.
