Should Gap Be On Your Shopping List?

With merchandise margins that were weaker than anticipated and operating expense deleverage of 120 basis points (to 31.7%), we think investors are concerned that no-moat

Gap increased its share in the clothing and accessories industry, with first-quarter sales growth of 10% versus an industry that has increased at a mid-single-digit pace for the year to date, thanks to strong Old Navy performance (comps of 3%). However, we don’t think the company will be able to defend its share over the long term, given that planned store closures ahead (200 Gap and BR store closures offset by 270 ON store openings) should naturally pressure the top line, and we have sales growth trending down from 2.2% in 2017 to 1.0% over the next five years, supported by flat comps at Gap, 1% comp declines at Banana Republic, and a 2% comp increase

at Old Navy. Furthermore, given the slow execution in improving the supply chain and necessary investment in technology to improve the business amid an intensely competitive landscape, we forecast operating margin contraction over the next decade, falling to 8.5% from 8.9% in 2017.

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