– Daniel Wu
The Gap Inc. (“GPS”), an icon of American fashion for the 90’s generation, has fallen on tough times in recent years. Along with its apparel retail peers, GPS has faced a slow bleed to e-commerce and then a sharp contraction in the aftermath of the COVID-19 pandemic. The brand, which has been losing relevance with American shoppers for years, recently found an unlikely ally in its attempt at reinvention – Kanye West and his fashion company YEEZY. The stock market reacted positively to the news, but can YEEZY bridge the gap for investors?
GPS has struggled with an identity crisis that pushed all three core brands – The Gap, Old Navy, and Banana Republic, into negative same-store sales growth territory last year. The company’s woes largely stem from The Gap brand (and Banana Republic to a lesser extent), which has declined every year for the last six years, with sales shrinking to $4.6 billion in FY19 from $6.3 billion in FY13. Industry experts and former executives attribute The Gap brand’s prolonged weakness to a lack of differentiated product and shopping experience, a more discerning consumer, and management’s unhealthy addiction to promotions to juice current quarter sales, which has trained customers to never pay full price. The fact that Old Navy, GPS’s family value brand, has cannibalized The Gap’s sales for years hasn’t helped either.
With this brief history, it is evident that GPS management is betting that the YEEZY brand cache will bring relevance to The Gap brand once more. The 10-year agreement calls for Mr. West to develop a new YEEZY Gap line of modern family apparel, presumably at The Gap price point, in exchange for royalties and potential equity in GPS based on staggered annual sales targets from $250 million (5% of FY19 Gap brand sales) up to $700 million (15% of sales). The first products are expected to launch sometime in 2021.
Sizing this opportunity for GPS is not easy, and the wide sales targets suggest the partners aren’t clear on the size of the opportunity either. Aside from sentimental reasons (West worked in a Gap store as a teen), it is difficult to square this partnership with YEEZY’s brand positioning. YEEZY is predominantly an upscale sneaker brand (in partnership with Adidas), produced in limited quantities and sold for several hundred dollars a pair. The limited apparel that YEEZY does sell ranges from $284 sweatpants to $925 cardigans, which promotes a brand image that clearly clashes with The Gap’s 75% off denim and $10 t-shirts. Bloomberg reports that YEEZY footwear sales were on track to reach $1.3 billion in 2019 – a substantial amount, but it must be noted that the collector sneaker market is very different from basics apparel. While we may be proven wrong, our sense is that YEEZY Gap may be a collaboration that doesn’t sit well with the target customer of either brand.
Even if YEEZY Gap drives a turnaround of the core Gap brand, shareholders still have to contend with a deteriorating performance at Old Navy and Banana Republic. Same-store sales at Old Navy, which for years pulled more than its weight, turned negative during FY19 as a result of executional missteps and management distractions (mainly a failed spin-off). The family-value oriented brand outperformed its sister brands during COVID-19 but not materially so, which is concerning considering the weak environment was one where Old Navy’s value proposition could shine. Banana Republic, which has had mixed performance over the last decade, will face even greater headwinds as its offering leans towards trendy professional attire that has no place in a work-from-home environment.
Overall, the YEEZY Gap partnership should be an incremental positive for GPS (after all, even $250 million of extra revenue is better than zero). But as always, investors need to consider whether the incremental news has been more than adequately reflected by the share price. In this instance, depending on the level of royalties and equity payout, Mr. West may stand to benefit more than GPS shareholders.
Daniel Wu is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.