Monday, June 29, 1998
The Gap Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>
Phone: 415-952-4400
Website: http://www.gap.com
Price (6/26/98): $61
HOW DID IT DOUBLE?
Falling into the Gap has been a good thing. For investors who have flocked to the casual apparel retailer through the years, the company has mastered a few things: the denim craze of the 1980s, the khaki revolution of the 1990s and, of course, the ultimate fashion statement -- capital appreciation.
Since the company went public 22 years ago at a split-adjusted price of $0.375 a share, the compounded annual return on the stock has topped 25%. Outpacing the market, and the competition, has been easy picking for the company, which has been guided by CEO Mickey Drexler since 1983.
However, the skies haven't always been denim blue. The stock lost 80% of its value in the aftermath of Black Monday in 1987. Occasionally, the shares will be stripped when same-store sales run sluggish, either when the shopping public as a whole goes cold or the rare instances when the chain's merchandise mix doesn't pan out. But, in a seemingly fickle segment where retailers come and go, Gap has been a steady performer.
The climate over the last few years has been spectacular for the chain. The economy and corporate attire trends have played right into the shelves of the San Francisco-based company. Over the last three years, the stock has been a four-bagger. And just recently, as global events have lead to margin improvement and great bottom-line performance, the stock has been fitted for a Daily Double.
BUSINESS DESCRIPTION
Beyond its namesake chain, the company also owns GapKids and babyGap. Around the time Drexler came on board, the company acquired Banana Republic, a more upscale concept (and no doubt a model for the khaki movement that would eventually carry over to the flagship chain). The newest Gap-owned chain is Old Navy Clothing Store, offering lower-priced apparel items.
FINANCIAL FACTS
Income Statement
12-month sales: $6996.3 million
12-month income: $585.7 million
12-month EPS: $1.44
Profit Margin: 8.4%
Market Cap: $24,705 million
Balance Sheet
Cash: $836.3 million
Current Assets: $1844.4 million
Current Liabilities: $999 million
Long-term Debt: $788.1 million
Ratios
Price-to-earnings: 42.4
Price-to-sales: 3.5
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Even if you are denim-averse, you are probably familiar with The Gap. From a recently stepped up marketing campaign to old Saturday Night Live skits, the retail chain has been deeply embedded in Americana. Finding the chain was easy. Finding the stock, and expecting the shares to exceed their excellent historical run was not that much harder to do.
The economy has been buzzing, and that has made for an optimistic bunch of store-hoppers with more disposable income. That money is getting divided among fewer brand name retailers as former mall heavyweights like Merry Go Round and Edison Brothers have been liquidated or have had massive store closings in bankruptcy reorganization.
The key is in the efficiency of the operators. The downtrodden loaded up on debt in what is often a low net margin industry. Not only is Gap a margin standout in the niche, it has also been pretty reluctant to bring on debt, only doing so with a $500 million offering last year when interest rates were substantially lower than the credit lines that suffocated Merry Go Round and nearly snuffed out Edison Brothers.
Gap bypassed those maladies, but the one sickness it did inherit, the Asian flu, worked towards a healthier company. While international expansion for the company has been lackluster, the shortcomings of the company as an export has been more than made up by the benefits of the company as an importer. With just 27% of its wardrobe made domestically, the higher dollar has made the overseas purchases that much cheaper. The tumbling Asian currencies have been especially kind since Gap is very dependent on Far East manufacturers.
By paying less for the same quality merchandise and then selling it to confident stateside buyers who are not demanding markdowns, the dramatic improvement in cost of goods sold has bulked up margins. When you marry that with improving same-store sales on a generally fixed property lease, you get a cost of goods sold and occupancy expense rate that has shrunk from 64% to just 60% over the past year.
WHERE TO FROM HERE?
Perpetual margin increases cannot last, but few will argue with Gap's chances of continued longevity. With Old Navy taking off, even as the flagship concept matures, the company is still expecting to grow selling space by 15-20% this year with new stores and by expanding or enhancing existing stores. Eventually, the company will have to address the international market, which has been a mixed bag.
Two months ago our very own Cash-King Portfolio bought into Gap. Old-timers around here may also remember that the company was once a Fool Port regular as well. Simply put, Gap has been a winner in increasing shareholder value.
The company has been a stellar operator, and it has also looked out for its shareholders. One may say that these goals are not mutually exclusive, that they both arrive to the same pleasant conclusion, but Gap is clearly a master on both ends. Through the years the company has been a regular repurchaser of its shares outstanding.
The company has grown, but insiders have held on to their 30% stake in the company. That is a sound practice to follow, since if the company ever masters the international retail market, the long-term upside could be an exciting fit.
-Rick Aristotle Munarriz
([email protected])