No-Moat Gap Has Problems, but Old Navy and Athleta Align With Trends and Are Fixable

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2027. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have about 1,500 locations in 10 years.