Good News, Bad News for Gap

As no-moat

We think Gap will continue to lose share to fast-fashion and off-price peers, with no clear execution on a plan to stave off losses we are currently seeing in key segments (Old Navy and Banana Republic continue to grow slower than the clothing and accessories market). As a result, we model same-store sales to be 1% on average annually over the next five years, below our expectation for 3% average annual retail sales growth. Given plans to offset the closure of Gap and Banana Republic specialty stores over the next few years with the opening of Old Navy, Athleta, and value-oriented stores, we see store growth as roughly flat over the next five years. With cost savings and improved inventory levels (likely leading to lower discount levels), we see operating margin stabilizing around 9%, in line with fiscal 2017 levels.

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