Fall

2016

THE GAP, INC. VAN-ANH PHAM SECURITY ANALYSIS

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Executive  Summary  

 

Rating  

HOLD  Sector/Industry  

Consumer  Discretionary/Specialty  Retail  

Company  

Gap  Inc.    Ticker  

GPS  

Date  

12  December  2016  

Company  Update  

Price  at  12  Dec  2016  (USD)                                          $25.86  

Target  Price                                                                                                $18.13  

Cash  Flow  and  Growth  Valuation     Worst   Base   Best  DDM   $15.94   $21.73   $33.62  Cap  Earns   $36.58   $44.63   $48.71  H-­‐Model   $15.94   $21.94   $34.10  

Relative  Valuation     Worst   Base   Best  Target  PE   $3.91   $6.33   $11.50  Target  Price   $11.98   $18.13   $30.57    

Company  Data  Price  ($)     25.86  Date  of  Price     12/12/2016  52  Week  Range     17.00  -­‐  30.74  Market  Cap     10.32B  Volume     4,218,217  EPS     2.41  

Highlights  Based   on   my   own   financial   research   and   different   analysis  method   being   applied   to   the   company,   I   am   suggesting   a  HOLD  status   for  Gap  Inc.    With  my  valuation,   I  am  confident  to   say   that   the   target   price   for   Gap   is   $18.13.   The   current  stock  price   is   being   traded   at   $25.86,   indicating   this   stock   is  overvalued.    

Growth  Factors:  • Closing  down  underperform  stores  and  shift  strategic  

plan   to   E-­‐commerce   market   will   help   Gap   to   boost  sales  and  cost  efficiency.    

•  Focus  on  U.S.  and  China  industry  as  Gap  is  generating  most  of  its  revenue  from  the  two  countries.    

Risk  Factors  • Rise   in   labor   costs   could   cause   suppliers   to   raise  

costs,  causing  higher  expenses  for  the  company  • Buyer   power   is   strong,   consumer   preferences   shift  

quickly.  Fail   to   realize   this   factor   could  cause  Gap   to  have  excessive  inventory  leftovers  and  low  sales.    

From  my   valuation  using   various   approaches,   it   implies   that  the   firm   is  being   traded   fairly.  The   firm   struggle   recently   to  improve   in   its   growth.  However,   the   company  has   remain   a  stable,   low   growth,   over   time   which   is   normal   for   Gap   Inc.  The   market   is   predicting   for   the   sector/industry   to   have  stronger   growth   in   the   near   future.   I   could   see   Gap   to  increase   in   its   growth.   Therefore,   I   am   confident   with   my  recommendation  to  HOLD.    

 

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Industry  Analysis    Apparel  Market  Overview    

The   U.S.   apparel   industry   consumed   $300.9  billion   in   revenue   for   2015,   creating   a   total  compound   annual   growth   rate   at   3.2%   from  2011  to   2015.   The   U.S.   industry   has   remains   a   stable  growth   in   the   trend   line   for   recent   years   and   is  predicting   to   continue  with   a  moderate   growth   up  to  2020.      (See  Table  1)  

 

The   U.S.   apparel   industry   is   classified   as   a   large,  fragmented   and   a   mature   industry.   The   market  environment  for  the  Apparel  Retail  Industry  is  highly  competitive   and   experienced   pricing   pressures,  whether   domestic   or   international.   Stock   prices   for  this   particular   industry   fluctuates   as   it   depends   on  consumers’   needs,   when   and   how   much   they’re  willing   to   spend.   Fashion   trends   change   quickly,  apparel   companies   need   to   be  highly   efficient   and  must   adapt   to   the   industry   environment   as   it  changes  constantly.  

Apparel  Industry  Definition  The   apparel   industry,   under   Consumer  

Discretionary   sector,   contains   companies   that   sell  

clothing,   footwear   and   accessories.   The   industry  consists  a  wide  range  of  products   from  basic  wears  such  as  T-­‐shirts  (ex:  Gap,  Aeropostale,  Hollister’s)  to  more   luxury   goods   such   as   designer   handbags   (ex:  Michael   Kors,   Coach,   Kate   Spade).   The   industry  operates   two   main   types   of   businesses,   which   are  wholesale  and  retail.    

Wholesale  operations       Wholesale   consist   of   companies   who  produce   and   sell   products   to   retailers   such   as  department  stores,  specialty  shops  and  discounters.  Wholesalers  often  import  products  from  developing  countries   for   lower   labor   costs.   Wholesalers   also  purchase   licenses   to   produce   goods   under  multiple  brand   names,   as   well   as   advertising   these   brands.  Brand   name   products   often   bring   in   profit   for  wholesalers   for   its  good   reputation  as  well   as  high-­‐end   quality.   A   wholesaler   would   have   the  competitive   advantage   over   its   peers   if   they  consume  multiple  brand-­‐names.  

However,  if  the  economic  is  not  in  a  good  condition,  it   could   be   tough   for   the   wholesalers   with   brand  name  products.  More  than   likely,  consumers  would  not   be   able   to   afford   high-­‐price   products.   They  would   rather   prefer   to   switch   products   to   private-­‐label  goods.  Private-­‐label  goods  are  goods  being  sell  at   discount   prices,   often   at   department   stores   or  discount   stores.   Though   private-­‐label   goods   are  being   sell   at   cheaper   prices,   they   are   more  profitable  than  brand  name  products.    

Wholesalers  consisted  of  27%  overall  value  in  2015.  (See   Table   2).   The  wholesale  market   use   year-­‐to-­‐year  sales   rather   than   quarterly   based   due   to   seasonal  sales.  We   also   look   at   operating  margin   and   profit  margin  performance  for  this  business.    

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Retail  operations    Retail   focused  on  where  stores  are  dedicated  

to  a  single  brand  name,  create  better  flexibility  for  a  company   to   monitors   its   own   products   and   have  better  control  over  its  brand  and  items.  Retailers  are  often   more   profitable   and   have   more   advantage  over  wholesalers,  by  dedicating  the  store  to  its  own  brand,  a  company  can  excludes  third  party  costs  and  raise  profits.    

As  the  market  has  become  more  technology  based,  more   retailers   are   also   focusing   on   selling   the  products   via   the   internet.   Online   retail   stores  increase  efficiencies  and  allow  consumers   to  access  the  store  anywhere  without  having  to  go  to  a  direct  location.   Online   retail   stores   are   also   often   more  profitable  due  to  little  to  none  staffing  and  also  low  equipment  requirements.      

Sales   for   retail,   like  wholesale,   are   also   very  highly  seasonal.  Majority  of   sales  often  were   influence  by  holiday-­‐based   or   back-­‐to-­‐school   event.   Retailers  compare   sales   through   year-­‐to-­‐year   analysis   to  predict   trend   lines.   The   retail   market   uses  “comparable-­‐store”   sales   to   indicates   performance  of  stores   locations  and  also  “sales-­‐per-­‐square-­‐foot”  is   another   metric   being   use   to   indicate   how  efficiently  are   the  business  being  operated  base  on  its  space.  Retailers  consisted  of  66%  overall  value  in  2015.  (See  Table  2)  

Apparel  category  segmentation  

 

In  2015,  the  womenswear  segment  took  the  majority   share   of   the   industry   at   52%   reported  revenue   of   $157.4   billion   in   2015.   This   segment  consists   of   specialized   products   for  misses,   juniors,  plus-­‐size  and  maternity  clothing  with  30%  composed  of   selling   tops,   20%   bottoms,   and   50%   other  specialized   products   such   as   dresses,   outerwear,  underwear,  etc.    

Menswear   segment   holds   31%   of   the   market,  reported  revenue  of  $92.5  billion   in  2015  with  38%  in  casual  wear,  20%   formal  wear,  and  42%   in  other  specialized   products   such   as   accessories,  sportswear,  etc.    

Childrenswear   holds   17%   of   the   apparel   industry  with  more   than  half   sales   came   from  girls’   clothing  at  55%.  Boys’  clothing  were  reported  at  21%  and  the  rest   were   others   including   infants’   and   toddlers’  clothing.      

Geography  segmentation  The   United   States   holds   24%   of   the   overall  

global   industry.   Asia   holds   the   largest   %   share   at  37%   and   Europe   at   28%.   The   Asia   segment   has   a  compound  annual  growth  rate  of  7.3%  respectively,  remains   at   a   stable   growth   over   time.   Thought  Europe   segment   has   larger  %   share   in   the   industry  than   the   U.S.,   its   compound   annual   growth   rate   is  slightly  lower  at  1.3%  year  over  year.  (See  Table  4)  

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Top  5  Major  Players    The  top  5  companies  with  well-­‐performed  revenues  in  2015  are:    

• Nike,  Inc.  • The  Gap,  Inc.  • H&M  Hennes  &  Mauritz  AB  • Nordstrom,  Inc.  • The  TJX  Companies,  Inc.    

 

Nike,  Inc.  (NKE)  NIKE,   Inc.   sells   athletic   footwear,   apparel,  

equipment   and   accessories   worldwide.   The  company   operates   through   three   segments,  womenswear,  menswear,  and  also  childrenswear.  In  2015,   the   company’s   revenue   grew   10%   at   $30  billion  with  gross  margin  increased  120  basis  points.    

The  Gap,  Inc.  (GPS)  Gap   sells   products   in   various   locations,  

globally.   The   company   also   operates   under   Gap,  Banana  Republic,   and  Old  Navy,   Piperlime,  Athleta,  

and  Intermix  brands.  Each  brand  sell  products  under  their  own  channel  and  online  websites.  In  2015,  the  company   owned   3,280   retail   stores.   Gap   sells  clothing  accessories  and  personal   care  products   for  men,  women,  children  and  babies  through  its  stores.  The   revenue   reported   in   2015   was   $16.4   billion,  remained  in  line  with  previous  year  at  $16.1  billion.  

H&M  Hennes  &  Mauritz  AB  (H&M  B)  H&M   is   a   company   headquartered   in  

Stockholm,   Sweden.   It   is   a   leading   retailer   selling  fashion   apparel,   cosmetics,   accessories   and  footwear   for  women,  men,   teenagers   and   children,  globally.   In  2014,   the  company  reported  with  3,511  stores.   Revenue   reported   for   H&M   in   2015   was  $26.3  billion,   increased   from  previous  year  at  $17.6  billion.    

Nordstrom,  Inc.  (JWN)  Nordstrom  is  one  of  the  major  companies  in  

fashion   specialty   retailers   in   the   US.   The   company  has   two   business   segments,   which   are   retail   and  credit.  Nordstrom  sells  apparel,  footwear,  cosmetics  and   accessories   for  men,  women  and   children.   The  retail   segment   has   263   stores   in   total,   including   an  online   store.   Nordstrom   revenue   increased   slightly  in  2015  reported  at  $13.5  billion.    

The  TJX  Companies,  Inc.  (TJX)  TJX   retail   stores   sell   apparel   including  

footwear   and   accessories,   home   fashion  merchandise   such   as   furniture,   décor,   and   home  accessories.   The   company   has   more   than   3,200  stores   open,   globally.   The   company   increased   in  revenue   reported   at   $29.1   billion   in   2015   versus  2014  at  $27.4  billion.    

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Porters  Analysis  Buyer  Power  

 

Overall:  Strong  

Buyer  power  takes  a  big  role   in   the  apparel  industry.   Shoppers   typically   do   not   have   a   direct  power  on  controlling  the  prices,  however  they  have  options   to   choose   where   to   shop   and   are   open   to  multiple  shopping  locations  rather  sticking  with  one  particular   company.   Therefore,   consumers   hold   an  indirect  bargaining  power.    

However,   buyers   are   only   powerful   if   buyers   are  being  concentrated.  If  there  are  more  suppliers  and  only   few  buyers,   buyers  will   have  more   advantage.  With   today’s   market,   suppliers   have   a   significant  large  number  of  costumers,  therefore,  with  a  loss  of  one  customer  will  not  have  a  tremendous  impact  on  the  company’s  revenue.  This  cause  has  weakens  the  buyer  power.    

Though  the  buyer  power  has  weakens  over  time,  we  must   not   neglect   the   consumers’   demand   as   the  fashion   trends   change   rapidly.   Apparel   companies  must  be  aware  of  the  news  and  social  media  to  keep  up   with   the   change   and   to   meet   customers’  expectation.  Overall,  buyer  power  is  rated  strong.  

Supplier  Power  

 

Overall:  Moderate  

The   industry   suppliers   are   mainly  wholesalers   and   manufacturers.   As   the   apparel  market  always   fluctuates  depending  on  consumer’s  needs,  suppliers  have  little  control  over  pricing  and  costs.   Majority   of   products   were   exported   from  third  world   country   for   low   and   inexpensive   labor  costs.  This  caused  it  to  be  more  difficult  for  suppliers  to  increase  pricing  and  costs.    

For   larger   companies,   they   produce   and   sell   their  own   products,   being   their   own   suppliers.   These  companies   look   to   have   their   manufactures   to   be  outside   of   the   U.S.   for   cheaper   costs.   Some   issues  they  might  experience  could  be   time  efficiency  and  legal  issues.  

More   manufacturing   companies   have   been   raising  labor   costs   due   to   regulation.   This   could   be   a  concern   in   the   near   future   as   it   could   potentially  increase  product  costs.    

 Overall,   supplier   power   is   rated   to  be  moderate   in  today’s  market.    

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Competitive  Rivalry  

 

Overall:  Strong  

The  apparel  market  is  highly  competitive  as  there   are  many   companies  out   there   selling   similar  products.   The   industry   also   runs   by   popularity   of  brands,   which   created   the   possibility   for   high-­‐end  companies   to   sell   their   products   at   much   higher  rates,   gain   competitive   advantage   over   other  unknown  brand  companies.    

Product   innovation   is   an   important   key   to  differentiate   a   company   from   its   peers.   Many  companies   have   tried   diversified   themselves   to  other   categories   other   than   just   apparel   products.  H&M,   for   example,   launched   beauty   products   and  home   goods   to   expand   its   target   audience   rather  than  focus  solely  on  just  clothing.    

Customers  have  options  of  where  to  shop  based  on  fashion   trend   and   products   prices.   This   cause   price  sensitivity  and  increase  the  intensiveness  of  rivalry.  Overall,   the   apparel   market   is   highly   competitive  and  is  rated  strong.  

Threat  of  New  Entries  

 

Overall:  Strong  

Many   international   retailers   are   aiming   to  expand   their   businesses   to   the   United   States.  Primark,   for   example,   a   low   price   retailers   from  Europe   is  planning   to  open   its   stores   in   the  U.S.  To  differentiate  itself  from  its  peers,  their  core  business  will   be   focusing   on   low   costs   and   operations   to  provide  products  with  low  prices  to  consumers.    

 It’s  not  hard  for  a  new  business  to  enter  the  market  if  they  keep  up  with  the  constant  fashion  trends  and  know   how   to   differentiate   themselves   from   their  competitors.  Especially  for  foreign  companies,  which  already  have  an  existing  business,  will  be  easier   for  those   type   of   firms   to   enter   the   market.   Think  Primark   for   example,   as   a   new   company   entering  the  U.S.  market,   if   it  has  competitive  strategies,  the  firm   could   possibly   could   compete   with   existing  players  such  as  H&M,  New  Look,  Forever21,  etc.  

However,  to  remains  stable  in  this  industry  could  be  difficult.   The   business   would   really   have   to   be  unique  in  their  products  and  services  to  maintain  in  the  apparel   industry.  Overall,   threat  of  new  entries  is  strong  in  the  apparel  market.    

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Threat  of  Substitutions  

 

Overall:  Weak  

The   threat   of   substitution   in   the   apparel  market   is   little   to   none.   There   is   not   yet   another  way   to   substitute   clothes   with.   Substitution   in   this  industry   is   more   competition   and   rivalry.   Or   an  option   would   be   for   consumers   to   directly   buy  products   from   manufacturers   through   online  channels   without   having   to   go   through   retailers   or  shopping   stores.   Home-­‐made   clothing   is   also   being  sell   through   online   channel   but   this   segment   is  relatively  small  and  doesn’t  have  a  significant  impact  to  the  market.  Overall,  threat  of  substitution  force  is  weak  for  this  industry.    

 

 

Five  Forces   Rating  Buyer  Power   Strong  Supplier  Power   Moderate  Competitive  Rivalry   Strong  Threat  of  New  Entrants   Strong  Threat  of  Substitutions   Weak    

 

 

 

*Porters  Analysis  Graphs   ranking   from  0   to  5  with  0   being   the  weakest  to  5  being  strongest.  

*Graphs   retrieved   from  Marketline   with   minor   changes   to   my  own  inputs  and  judgement.  

Porters  Competitive  Strategies      

  Competitive  Advantage  

Compe

titive  Scop

e     Lost  Cost   Higher  Cost  Broad  Target  

Cost  Leadership  

Differentiation  

Narrow  Target  

Cost  Focus   Differentiation  Focus  

 

In   this   industry,   there   are   two   core   strategies  which  are:  

• Low   price-­‐   a   strategy   that   relies   on   setting  an   appropriate   price,   either   comparable   or  slightly   lower   price   than   competitors   to  provide  competitive  advantage.  

• Differentiation-­‐   a   strategy   that   can  distinguished   a   company   with   its   peers  based   on   quality,   product   innovation,  marketing,   etc.   to   provide   competitive  advantage.    

For   example,   Nike   has   become   one   of   the   largest  sports   brand   globally.   It   outperformed   competitors  such  as  Puma,  New  Balance,  and  Reebok.  Adidas   is  considered   to   be   the  major   rival   against  Nike,   as   it  shares  the  same  audience  target  and  business  focus.  Nike  was  able  to  differentiate  itself  from  its  peers  by  using   famous   athletes   for   marketing,   to   advertise  its  line  of  products.    

Nike   paired   up   with   Michael   Jordan   to   expand   its  brand  name.  Michael   Jordan   is   an   iconic   basketball  player  with  the  most  successful  shoe  lines  dedicated  towards   basketball   shoes.   This   created   exclusivity  for   Nike   as   it   generates   high   returns   for   the  company,   as   well   as   high   reputation   towards   its  name  and  quality.    

Another  example,  H&M  practices  low-­‐costs  strategy  and  differentiation  to  help  stands  out  from  its  main  competitor,   Zara.   H&M   paired   up   with   famous  designers  to  produced  high-­‐end  styles,  however  was  

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still   able   to   provide   affordable   prices   to   young  consumers  with  age  ranges  from  16-­‐25.    

Recently,  H&M  did  collaboration  work  with  Balmain  to   generate   a   high-­‐end   collection   with   limited  inventory.  Balmain  is  a  French  fashion  company  with  apparel   price   ranges   from   $1,000   to   $5,000   per  item.  Through   the  collaboration,  Balmain  has  made  its   products,   which   sells   through   H&M,   at   lower  prices   ranges   from   $500   and   under.   This   attracted  many  customers  from  all  locations,  to  line  up  before  open   hour   in   order   to   buy   these   expensive   design  products   at   cheaper   prices.   Through   this  collaboration   work,   H&M   was   able   to   distinguish  itself   from   competitors,   generate   more   sales   and  also  increase  its  brand  name.    

For   firms   that   are   focused  and   committed   to   these  strategies,  they  are  more   likely  to  have  competitive  advantage   over   its   competitors.   With   low   price  strategy,   a   firm   can   sells   products   at   a   comparable  rate   and  perform   their   tasks  more   efficiently   than  its  peers.  By  differentiated  itself  from  competitors,  a  firm  can  provide  unique  quality  and  activities  such  as   designs,   customer-­‐service   that   can   attract   more  consumers   and   can   sells   their   products   at   a  premium  price.    

Trends  and  Issues  Inventory  Management     Fashion  trends  are  highly  based  off  seasonal  sales   and   it   is   very   unpredictable   to   what   type   of  new  products  will   come  out  next.  Fashion   fads  also  don’t   last   long   in   the   industry,   usually   only   last   6  months  to  a  year.  The  product  cycle  for  this  industry  is  a  challenge  due  to  styles  being  constantly  evolved.  Retailers   have   to   work   quickly   to   sale   off   the  inventory  by  using  discounted  prices  in  able  to  meet  their  profit  margin.    

Another   challenge   that   ties   into   the   product   cycle  issue   is   historical   data   is   also  being  affected  by   the  fluctuations   of   locations,   pricing,   new   product,  season,  marketing.   Therefore,  when   new   items   are  

being  generated,  firms  would  have  no  historical  data  to  base  off  for  projection.    

Economic  Trends     Economic   trends   take   an   important   role   in  the   fashion   industry.   The   increased   in   price   for  materials   and   rising   in   labor   costs   has   cause   profit  margins   to   decrease   slightly   for   most   retailers.   In  today’s   economic   trends,   many   retailers   would  partner   up   with   each   other   to   broaden   their  customers’   target,   and   they’re   also   participate   in  merger  and  acquisition  to  grow  their  share.    

Technology  has  also  become  more  of  a  challenge  for  the  apparel   industry  as  more  people  are  joining  the  workforce   and   less   personal   time   to   physically   go  shopping   at   local   location,   they’d   prefer   to   browse  the   internet   for   pricing   comparison   as   well   as  shopping   through   online   retail   sites.   This   is   more  difficult   for   companies   to   study   the   customer  behaviors   and   their   preferences.   Though   there  will  be   a   solution   to   this   issue   in   the   near   future   for  apparel  companies  to  move  toward  technology  and  internet   based,   the   companies   would   have   to  constantly   adapt   to   the   fast   pace   environment   and  conduct   research   on   a   daily   basis   to   improve   and  keep   up   with   the   market.

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Macro  Analysis  Demographics   Demographics   take   a   major   role   in   the  apparel   market.   Studying   the   industry’s  demographics   help   understand   different  preferences   of   individuals   to   promote   and   increase  marketing   and   sales   strategy   towards   specific  audience.   We   will   be   focusing   on   the   two   main  segments   of   the   industry   which   are   womenswear  and  menswear.  

Womenswear  segment   The   revenue   for   the  womenswear   segment  has   been   declining   over   years,   largely   come   from  low  to  middle  income  households.  This  target  group  has   been   more   conscious   of   their   spending.  However,   wealthier   households   are   more   likely   to  spend   money   on   luxury   goods,   which   will   be   the  main  driver  for  the  industry  growth.    

Spending  based  on  households  income   For   households   with   average   income   less  than  $30,000  a  year,  consumers  often  only  purchase  good   when   necessary   needed.   This   segment   has  decreased   over   time,   more   consumers   are   price  conscious   and   choose   to   lean   towards   discount  department  stores.  

 

Households   with   income   between   $30,000   and  $70,000   took   28%   over   the   segment   revenue.  Consumers   under   this   category   tend   to   shop   for  more  goods   that  are   trendy  and  currently   in   styles,  whether  branded  or  unbranded.  Large  count  of   the  consumers   often   shop   through   online   retailers.  Revenue  for  this  segment  has  been  stable.    

Consumers  with   income  $70,000  or   above   are   able  to  purchase  for  more  high-­‐end  products  at  premium  prices.  Consumers   in   this   segment  are  expecting   to  increase  over   time  and  will  help  to   creates   growth  for  the  womenswear  segment.

Age  group  Women  between  age  group  from  20  –  39  

years  old  are  the  key  demographic  for  the  women  segment.  However,  the  industry  is  expecting  a  slow  increase  in  age  group  of  women  from  20  –  64  to  be  the  main  demographic  for  this  segment.    

Locations  The   Southeast   region   has   the   largest  

population   in   the   U.S.  With   that,   this   region   holds  the  largest  share  of  the  industry  in  2016,  reported  at  26.2%.  

The   Mid-­‐Atlantic   region   holds   18.8%   share   of   the  industry.   The   average   income   for   this   region   is  reported   at   $72,800   a   year.   This   region   is   an  opportunity   to   focus   on   profitability   for   high-­‐end  products  aiming  toward  wealthier  consumers.    

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The  Western  region  holds  15.8%  in  2016.  This  region  focus   on   small   clothing   boutiques,   new  entrepreneurs  and  new  fashion  designers.    

Menswear  segment     Revenue  for  this  segment  is  expecting  to  have  a  slow  growth  up  to  2021  (Based  off  IBIS  World).  Male  consumers  are  now  more  favorable  towards  online  shopping,  indicated  that  there  will  be  changes  in  the  near  future  for  this  segment.    Demographic  changes     As   older   generation   is   retiring   and   younger  males   will   join   the   workforce.   Men’s   clothing  retailers   will   shift   its   target   audience   towards   the  younger   age   group.   Many   industries   now   allow  business   casual   instead   of   formal   wear   dress   code  will  also  causes  the  preferences  and  styles  to  change  in  this  segment.    

Incomes     The   lowest   income   consumers   accounts   for  20.8%   of   the   revenue.   Consumers   in   this   category  tends   to   work   in   uniforms   and   casual   wear   work  environment,   less   needed   for   formal   suits.   They  typically   shop   at   discount   stores   or   affordable  fashion  retail  outlets.    

The   middle   income   accounts   for   37.1%   of   the  revenue.   Consumers   in   this   category   have   higher  demand  compare  to  the  lower  income  consumers.  

The   wealthy   income   consumers   account   for   42.1%  of  the  segment  revenue.  These  consumers  will  more  likely  to  purchase   luxury  goods  and  premium  brand  suits.  Over  time,  this  category  has   slowly   increased  the  share  of  the  total  industry.  

Locations   The  Mid-­‐Atlantic  region  and  New  York  State  hold   the   most   corporate   offices,   which   increase  consumer’s   demand   for   formal   suits   and   office  attires.   This   region   is   also   large   in   population,  leading   more   sales   and   generate   growth   for   the  segment.    

Wages     The   U.S.   apparel   industry   mainly   get   it  resources   and   products   made   out   of   the   country,  large   amount   are   being   produced   from   countries  based   in   Asia.   In   2016,   minimum   wages   in   the  industry  for  these  countries  continue  to  increase.    

 

 On   average,   Asia   experienced   over   5%   increase   in  minimum   wage.   The   demand   for   an   increase   in  minimum  wage  are  due  to  various  reason.  Workers  are  working  full-­‐time,  over  60  hours  a  week,  felt  that  they   should   get   pay   higher   for   the   labor   that   they  provided.   Also   governments   in   these   region   are  demanding   for   more   safety   enforcement   for  employees.    

Wages   accounts   for   13.9%   revenue   in   the  womenswear   segment   and   15.7%   for   menswear  segment   for   retail   stores.   Majority   of   jobs   offered  are   part-­‐time   sales   associates,   merchandising   and  customer   services   staffs.   Retailers   often   raise  number   of   staffs   when   holidays   and   special  occasions  are  near.    

The  requirement  to  increase  wages  could  lead  to  an  increased   in   manufacturing   costs   and   this   could  potentially   hurt   these   specific   regions   as   it   will  causes   more   competitions   within   suppliers   as  companies   will   aim   more   for   other   locations   who  can   provide   cheaper   costs.   An   example   would   be  that   more   apparel   companies   are   moving   out   of  China   towards   other   countries   such   as   Cambodia  and   Vietnam   for   manufactures   due   to   inexpensive  and  cheaper  labor  costs.  

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Industry  Forecas

Based  off  Statista,  the  industry  in  the  U.S.  is  expected   to   increase   from   $225   billion   in   2012   to  $285   billion   in   2025   with   a   compound   annual  growth   rate   at   2%.   Globally   is   projected   at   $1,105  billion   in   2012   to   $2,110   billion   in   2015   with   a  compound  annual  growth  rate  of  5%.    

Retailers  are  predicting  for  a  stronger  growth  in  the  upcoming   years   as   the   assumptions   of   more  consumers  demands  will  increase  over  the  year  due  to   the   economy   picking   on   in   jobs   and   wages.   As  well   as   with   technology   evolving,   the   market   is  predicting  for  more  online  retail  sales  to  rise.    

Conclusion     By  reviewing  the  analysis,   I  believe  that   the  apparel   retail   industry   will   experience   low   growth  for   the   upcoming   years,   but   will   remains   a  moderate  growth  in  the  long  run.    

Apparel   industry   is  difficult   to  predict  as   it   is  based  on   consumers’   needs  and  economic   factors.  During  good  economic  time,  more  people  would  choose  to  

do   their   shopping   and   spend  money   on   items   that  are   leaning   towards   non-­‐essential   items,  unnecessary   goods.   If   the   economic   is   declining   or  experiencing   recession,   consumers   would   cut   back  on  unnecessary  goods.    

However,   with   today’s   economy,   unemployment  rate   remains   low   at   4.9%   and  more   jobs  are  being  added   to   the   workforce.   More   people   are   getting  jobs  which  help   them   to  afford  purchasing   clothing  items,  accessories,  home  goods,  etc.    

More   people   joining   the   workforce   indicates   that  people   has   become   more   productive   and   busy   for  their   personal   life   activities.   This   lead   to   less   time  going  out  shopping  for  clothes,  grocery,  etc.  People  have   been   preferred   to   shop   through   online  retailers,   browsing   internet   for   items   and   prices.  Technology   has   taken   a   big   role   into   the   apparel  industry.    

If   apparel   companies   can   keep   up   with   constant  changes   in   the   market,   it   will   be   able   to   produce  

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growth   over   time.   Adapting   to   the   environment   is  the  main  key  to  remains  stable  in  this  industry.  

 

 

Company Analysis About  Gap  Inc.   Gap   Inc.  was   founded   in  1969  by  Doris   and  Don  Fisher,  in  the  state  of  California  and  went  public  in   1976  with  an  offering  of  1.2  million   stock   shares  at   the   time.   Gap   Inc.   is   headquartered   in   San  Francisco,   California  with   approximately  more   than  150,000   employees   and   an   estimate   of   3,300  company-­‐operated   stores   and   400   franchise   stores  globally.      

Gap  Inc.  is  a  globally-­‐leading  apparel  retail  company.  The   company   provides   apparel,   accessories,   and  personal   care   products   for   women,   men,   and  children.    Gap   Inc.  operates  under  multiple  brands,  which  includes  the  Gap,  Banana  Republic,  Old  Navy,  Athleta,  and  Intermix  brands.    

The  company’s  key  products  include:    

• Apparel  • Handbags  • Shoes  • Jewelry  • Personal  care  products  • Eyewear  • Accessories  

The   company  operates   its   stores   in  North  America,  Europe  and  Asia.      

Gap   Inc.   as   of   today,   has   a  market   cap   of   $8.86  billion.   The   company   reported   revenues   of   $16.4  billion   in   2015   with   the   United   States   being   the  

company’s   largest   geographic  market;   it   accounted  for  77.1%  of  the  company’s  total  revenue.    

Gap  Gap   brand   focuses   on   casual   style   leaning   towards  comfortable,   classic   and   modern   clothing.   Gap  brand   is   operated   in   1,700   company-­‐owned   and  franchise   retail   locations,   globally   to   around   70  countries.    

Banana  Republic  Banana  Republic  was  founded  in  1978  to  which  Gap  Inc.   in   1983   later   acquired   it.   The   brand   offers  luxurious   goods,   high-­‐end   design   clothing   and  accessories.   The   brand   operates   an   online   channel  and  over  750  retail  locations  worldwide.    

Old  Navy  Old  Navy  was   founded   in   1994.   The  brand   reached  annual   revenue   of   $1   billion,   becoming   the   first  retailer  to  achieve  the  highest  of  sales  in  less  than  a  four  year  of  operation.  The  brand  offers  casual  style  clothing  and  seasonal  fashion  wears.  Old  Navy  is  one  of   the   largest   apparel   brands   in   the   world   with  online  and  more  than  1,000  stores  worldwide.

Athleta  The   brand   focused   on   women’s   sport   wears  segment.  Athleta  designs  fashionable  sport  attire  for  the  gym  and  studio.  It  first  opened  its  full-­‐sized  store  in  2011.    

Intermix  Intermix  was  founded  in  1993  then  was  acquired  by  Gap   Inc.   in   December   2012.   The   brand   is   a   multi-­‐brand  fashion  retailer,  focused  on  a  mix  of  different  types   of   high-­‐end   trends   with   several   of   designer  products.   The   brand   operates   through   an   online  retail  site  and  more  than  30  boutiques  in  the  United  States  and  Canada.    

Management  Art  Peck  Chief  Executive  Officer,  Gap  Inc.    

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Art   Peck   joined   Gap   Inc.   in   2005   and   has  experienced   various   senior   leadership   positions  within   the   company   prior   to   become   CEO.   He  graduated   from   Occidental   College   in   Los   Angeles,  California,   and   achieved   his   MBA   from   Harvard  Business  School.    

From  2008  to  2011,  Art  served  in  the  Outlet  division,  leading  the  team  to  deliver  strong  sales,  expand  the  division   globally   and   to   have   the   first-­‐ever   Outlet  store  openings  in  Canada  and  Europe.    

From   2012   to   2015,   he   served   as   President   of   the  company’s   Growth,   Innovation   and   Digital   division,  focusing   on   making   strategic   plans   for   Gap’s   e-­‐commerce   sales   across   80   countries.   He   has   added  value   to   the  growth  of   the  emerging  brands,  which  allowed   him   to   acquired   Athleta   in   2008   and  Intermix  in  2012.  

Art   later   served   as   executive   vice   president   of  Strategy   and   Operations.   He   launched   the  company’s  first  franchise  business,  now  increased  to  400  franchise  stores  open  worldwide.    

Sabrina  Simmons  EVP  and  Chief  Financial  Officer,  Gap  Inc.  

Sabrina   Simmons   joined   the   company   in   2001   and  was   appointed   CFO   in   January   2008.   Prior   to   Gap,  Inc.   she   has   held   positions   at   Levi   Strauss   &   Co.,  Hewlett   Packard   Company,   and   KPMG.   Her   role   at  Gap   Inc.   is   to  manage  and  oversee   real  estate,   loss  prevention  and  all  global  financial  departments.  

With   her   position,   Sabrina   has   shown   a   well-­‐developed   financial   discipline   throughout   the  organization   and   has   helped   strengthen   the  company’s   capital   structure   that   helps   increase  shareholder  distributions.    

Sabrina  graduated  from  the  University  of  California,  Berkeley,   with   a   Bachelor’s   in   Finance.   She   later  received  her  MBA  from  the  Anderson  School  at   the  University  of  California,  Los  Angeles.    

Michael  Yee  EVP,  Global  Supply  Chain:  Sourcing  and  Production,  Gap  Inc.  

Michael  has  been  with   the  company   for   four  years.  Under   his   management,   the   global   sourcing   team  has   been   establishing   the   company’s   category  sourcing  model,   enabling   faster   and  more   efficient  decision   making,   streamlining   brand   interactions  and   expanding   its   relationships   with   factories   and  mills.    

Michael   received  his  Bachelor’s   from  the  University  of  British  Columbia  and  his  MBA  from  the  University  of  Western  Ontario.    

Sustainability  Strategy   Gap  Inc.  key  part  of  their  vision  of  success  is:  

  “…creating   opportunities   for   the   people   and  communities  touched  by  our  business  throughout  the  world.”  

 

The   company   strategy   has   three   focus   which   are  creation,   integration   and   impact.  Gap   Inc.   strategy  is   to   focus   on   its   people   and   external   and   internal  environmental   issues,   to   create   changes   that   can  help   benefit   the   company,   people,   and   the  communities.    

Some  of  the  company’s  strategies  are:    

• Aiming   to   enforce  more   safety   practices   at  their  work  environment,  to  create  incentives  that   can   guide   employees   to   be   more  productive   and   create   better   quality  products.    

• Collaborate  and  work  with  stakeholders  and  engage  them  in  the  company’s  strategy.    

“When  we   improve  working   conditions   and   create  opportunities  for  the  people  who  make  our  clothes,  we  enhance  our  ability  to  deliver  great  products  to  our   customers.   Our   sourcing   and   sustainability  teams   work   together   seamlessly   to   bring   benefits  to  everyone,  from  our  partners  to  the  people  whose  

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lives   we   touch   in   communities   throughout   the  world.”  

-­‐Sonia  Syngal,  EVP,  Global  Supply  Chain  &  Product  Operations  

 

The  company  believes  that  by  focusing  on  its  people  and   the   environment   first,   the   company   can   then,  be  able  to  deliver  high-­‐quality  products  and  services  to  its  customers.    

Competitive  Position  

  Gap   Inc.   is   one   of   the  major   players   in   the  U.S.   apparel   market,   however   they’re   only  accountable   for   less   than  5%  market   share,  due  to  the   market   being   so   diverse   with   multiple   apparel  retailers  being  out   there.   For  example,  Macy’s  held  9%  and  Wal-­‐Mart  held  over  7%  market  share  of  the  U.S.  market.    

Gap   Inc.’s   main   competitors   would   be   American  Eagle   Outfitters   (AEO),   Aeropostale   (AROPQ),   and  Abercrombie   &   Fitch   (ANF).   Gap   Inc.   has   a   larger  market   share   compared   to   its   competitors.   AEO,  AROPQ   and   ANF   combined   only   made   up   close   to  2%  of  the  total  market  share.  Competitors   like  Zara  and   Forever21   are   privately   held,   therefore,   there  are  no  data  towards  their  market  share.    

As   Table   1   shows,   Gap   Inc.   total   market   share   has  been   decreasing   over   time   from   5.1%   to   4.7%.  Though   with   market   share   decreasing,   Gap   Inc.’s  

position   in   the   apparel   market   still   remains   strong  compared  to  its  competitors.    

However,  Gap  Inc.  could  see  a  potential  competition  growth   against   the   “fast-­‐fashion”   retailers   such   as  Zara   and   Forever,   as   consumers’   preferences   are  shifting   towards   these   trends   rather   than   casual  styles.    

Risk  Factors  Apparel  trends  and  changes  in  consumer  preferences     Gap   Inc.’s   success   is   mainly   dependent   on  the  ability  to  provide  the  right  products  and  services  to  consumers  to  meet  their  expectations  in  a  timely  manner.   The   global   apparel   industry   fluctuates  due  to   different   seasonal   changes   and   consumers’  preferences,  which   causes   the  difficulty   to   produce  products  that  are  suitable  for  certain   local  markets.  This   could   cause   the   company   to   not   be   able   to  deliver   their   product   in   time,   compared   to   its  competitors.   If   the   company   fails   to   keep   up   with  apparel   trends   and   consumer   preferences,   it   could  affect   its  sales  and  excess   inventory  could  potential  affect  operating  results.    

Inventory  management  Linked   to   the   above   risk   factor,   the   fluctuations   of  the   global   apparel   market   could   impact   the  inventory   of   the   company.   For   retailers,  merchandise  must  be  ordered  in  advance  before  the  selling   peak   happens,   which   usually   occurs   during  seasonal   changes,   holidays,   or   when   the   fashion  trends   start   to   shift.   If   the   company   sales   do   not  meet   the   market   expectations,   this   could   cause  excess  inventory  leftover,  leading  to  large  amount  of  markdowns   to   sell   off   the   inventory,   and   will  eventually  results  in  lower  margins.    

Data  security  risks  Cyber-­‐attacks   have   been   aiming   for   retail   industry  and   Gap   Inc.   is   concerned   towards   not   having  enough   resources   to   prevent   any   types   of   cyber-­‐

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attacks,   if   this   potential   risk   occurs.   Actual   attacks  can   cause   damages   towards   the   company’s  technological  capabilities,  and  Gap  Inc.  may  have  to  incur   increasing   costs,   which   includes   costs   for  additional   personnel   and   protection   technologies,  train  employees,  and  engage  third-­‐party  experts  and  consultants.    

International  expand  might  not  be  successful  One  of   the   company’s   strategies   is   to   continue   the  expansion  of  their  brand  around  the  world.  Gap  Inc.  is   planning   to   open   company-­‐owned   stores   as  well  as  franchise  and  online  stores  to  multiple  countries.  However,   they’re   limited   in   experience   towards  some  locations  and  might  face  difficulties  competing  with   already   established   businesses.   Consumers’  preferences   and   trends   may   differ   in   certain  locations  and  could   results   in  unexpected  sales  and  margins.    

Failure  to  maintain  our  reputation  and  brand  image  Gap  Inc.  has  a  wide  recognition  towards  their  brand  reputation   and   products   quality.   To   maintain   a  positive  recognition  is  very  crucial  to  the  company.  If  failure   to   protect   their   reputation   occurs,   the  company’s   image   could   be   impacted   negatively,  affecting  the  results  of  operations.    

SWOT  Analysis  Strength    

Expansion  globally  

  Gap  Inc.   is  operated  in  various  geographies.  Gap   operates   company-­‐owned   stores   in   the   US,  Canada,  the  UK,  France,  Ireland,  Japan,  China,  Hong  Kong,   Italy   and   Taiwan.   The   company   also   has  franchise   agreements   to   operate   in   Asia,   Australia,  Europe,   Latin  America,   the  Middle   East,   and  Africa.  Gap  also  operates   its  online   retail   sites  available   to  

90   countries.   In   2015,   the   company’s   e-­‐commerce  revenues  reported  at  $2.5  billion.    

With   global   operations,   Gap   Inc.   can   diversify   its  business   risk  by  not   focusing  mainly  on  one   region  such  as  the  UK,  and  US  but  was  able  to  have  a  large  customer  base  globally.    

 

 

Well  diversified  brands  

The  company  operates  various   types  of  brands  and  operation  segments  that  help  it  expand  and  attract  different   types   of   customer   groups.   For   example,  Gap   brands   focused   on   casual   style,   operates   not  just   at   retail   level   but   also   through   outlet   and  factory   stores,  offering   similar   styles  but  at  a   lower  price,   targeting   lower   income   consumers.   Banana  Republic   sells   more   office   and   formal   attires   for  women  and  men,  at  higher  prices,  however  also  do  offer   outlet   and   factory   stores   to   sells   products   at  lower  prices.      

 

Well-­‐developed  Omni-­‐channel  

Gap   serves   order-­‐in-­‐store,   reserve-­‐in-­‐store,   find-­‐in-­‐store,   and   ship-­‐from-­‐store   to   provide   several   of  services   to  consumers,  making  their  shopping  more  efficiently.    

Weakness    

Dependence  on  outside  vendors  

Gap  depends  on  outside  vendors  for  manufacturing  its   products,   the   company   itself   does   not   own   any  factories.   Gap   uses   outside   sourcing   from   more  than   1,000   vendors.   Only   2%   of   its   merchandise  purchased   was   from   the   U.S.,   the   98%   were   from  other   countries   with   China   being   the   largest  suppliers   out   of   all.   This   limits   Gap   the   ability   to  have   control   over   the   products   being   purchased.  This  could  affect  the  brand’s  reputation  negatively  if  

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the   quality   of   the   products   does   not   meet  consumers’  expectations.    

 

Expansion  to  emerging  market  

Gap   has   not   made   any   further   progress   into  operating  its  company  in  the  emerging  markets.  This  could   limit   its   opportunity   for   growth   and  expansion.    

 

   

Opportunities    

E-­‐commerce  expansion  

E-­‐commerce  market  has  been  growing  at  a  fast  pace  as   people   are  more   dependent   on   technology.   The  US   e-­‐commerce   retail   sales   increased   from   $169.3  billion  in  2010  to  $297.2  billion  in  2014,  resulting  in  a  compound  annual  growth  rate  of  15.1%.    

More   retailers   are   preferring   to   use   E-­‐commerce  market   due   to   lower   operational   costs   and   low  maintenance.   Customers’   preferences   are   also  leaning   towards   online   shopping   as   it   is   more  convenient  for  them.    

 

Positive   improvement   for   apparel   industry   in   the  US  and  China  

According   to   MarketLine,   the   US   apparel   industry  has   been   increasing   and   is   predicting   to   grow  22%  from   2014   to   2019   in   sales.   As   the   economic   is  

improving,   it   will   lead   to   a   higher   demand   of  consumer  spending.    

For   China,   the   market   is   predicting   to   grow   63%  from   2014   to   2019   in   sales.   By   expanding   more  stores   in   China,   the   company   can   expect   a   high  growth  for  this  geographic  segment.    

 

Opportunity  to  grow  in  luxury  retail  market  

The  luxury  retail  market  has  been  growing  globally,  driven   by   emerging   markets   from   Latin   America,  Asia   Pacific   and   Africa.   Developed   markets   also  increasing   on   the   demand   for   luxury   products.   By  expanding  its  brands  to  luxury  market  could  help  the  company   diversified   its   segments   and   business  operations.    

Threat    

Rise  in  labor  costs  

The   US   has   been   increasing   in   its   labor   costs   as  government   demand   to   raise   minimum   wages.  Overtime,   the  US   has   been   increasing   its  minimum  wages  above  $8  an  hour   in  many   states,   compared  to   $6.55   per   hour   in   2009   and   $7.25   per   hour   in  2010.    

Europe   and   China   has   also   been   increasing   its  minimum   wages   steadily   over   time.   With   China  being   the   largest   suppliers   to   Gap   Inc.   This   could  impact  the  company’s  operating  cost  and  affect  its  margins.    

SWOT  ANALYSIS  TABLE  Strength  

• Expansion  Globally  • Well-­‐diversified  brands  • Well-­‐developed  Omni-­‐channel  

Weakness  • Dependence  on  outside  vendors  • Expansion  to  emerging  markets  

Opportunities  • E-­‐commerce  expansion  • Positive   improvement   for   apparel   industry   in  

the  U.S.  and  China  • Opportunity  for  grow  in  luxury  market  

Threats  • Rise  in  labor  costs  • Counterfeit  products  

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Counterfeit  products  

More   counterfeit   products   have   come   in   to   the  market   as   the   substitution   for   high-­‐end   price  products   such   as   designer   handbags,   sunglasses,  footwear,  etc.  These  products  can  be  found  at   local  flea  markets  and  have  become  popular  over  time  as  it  offers  cheaper  prices.  China  reported  them  as  the  main  source  for  counterfeit  goods.    

The   existence   of   counterfeit   products   could   impact  the   company   negatively   by   bringing   in  misleading  quality  products  and  dilute  the  brand  image.    

 

Conclusion   Gap   Inc.   has   been   decreasing   in   its   sales  over   time.   Though   despite   the   drop,   the   company  still   remains   strong,  being  one  of   the  major  players  for  the  apparel  market.    

With   the   company   being   well   diversified   in   brands  that   produce   different   types   of   apparel   products,  which   target   different   types   of   consumer   groups,   I  think  that  Gap  Inc.  has  the  potential  to  rise  back  up  in   its   sales.   The   company   focuses   on   multi-­‐geography   segments   and   operates   through   several  other   countries,   which   helps   the   company’s   brand  recognition  to  be  better  known,  worldwide.      

By   looking   for  opportunities  such  as  expanding   into  more   geographical   segments   can   help   increase   its  brand  names  to  be  more  well-­‐known  for  consumers;  aiming   towards   e-­‐commerce   sales   as   more  consumers  are  shifting  to  online  shopping  could  lead  to   a   positive   impact   on   the   company’s   sales   and  operation  costs.    

The   firm   also   has   a   sustainable   strategy,   which  focuses   on   creation,   integration,   and   impact.   This  drives  the  company  to  seek  for  innovation,  provides  effort  to  bring  benefits  for  both  its  company  and  its’  customers.    

Though   the   company   has   some   competitive  advantages   over   its   competitors   based   on   size   and  segmentations,   however,   consumer   preference  changes   and   fashion   trends   can   be   a   major   risk  towards   the   company.  More   customers  are   leaning  towards   fashionable   retailers   such   as   Zara   and  Forever21,   this  could  dilute   the   sales  grow  for  Gap  Inc.  over  time.  

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Fundamental & Ratio Analysis  

  This   section   will   focus   on   the   company  financial  analysis  comparing  to  its  competitors.  I  will  be   discussing   over   the   two   important   assessments  which   are   short-­‐term   viability,   cover   liquidity   and  solvency  and  long-­‐term  growth  outlook,  focusing  on  turnover  and  margins.  The  company’s  historical  data  could   go   back   as   far   as   1995   to   most   recent   2015  financials.    

Assessment  of  Short-­‐Term  Viability   With   short-­‐term   viability,   I   will   be   focusing  on  liquidity  and  solvency.    

Liquidity  

Liquidity ratios focus on determining the sources and uses of cash of the company, to avoid any unexpected issues that could occur causing the company to borrow more debt.

CFO  vs.  EBIT  

Gap   reported   compounded   annual   growth   rate  (CAGR)   at   1.75%   overtime   while   their   earnings  before   interest   and   taxes   (EBIT)   trends   downward  at  -­‐0.50%.  Overtime,  CFO  and  EBIT  remained  in  line  together   except   despite   2013   drop   in   CFO   due   to  various  taxes  factors  such  as  timing  of  tax  payments,  income   taxes   payable,   and   other   tax-­‐related   items,  results   in   a   decreased   of   $231   million   compared  from  2012  to  2013  CFO.    

With   CFO   and   EBIT  moving   along   together  most   of  the   time,   this   proves   that   the   earnings   are  more   a  

results  of  economic  rather  than  being  supported  by  accounting  accruals.    

Cash   from   operation   decreased   in   2015   primarily  due   to   a   decrease   in   net   income   due   to   lower  revenues  and  a  decrease  in  other  current  assets  and  other  long-­‐term  assets  resulting  from  the  company’s  credit   card   program  with   different   timing   payment  that  lead  to  increase  in  cash  inflows  at  a  later  time.    

Though   the   company   CFO   and   EBIT   trends  downward  for  2015,  the  important  factor  to  take  in  consideration   is   that   they’re   both   trends   along  together  and  CFO  still  perform  slightly  higher   than  EBIT.    

 

Net  Working  Capital  Requirements  

Working   capital   assets   has   remained   higher   than  working   capital   liabilities   for   Gap   Inc.   Working  capital   assets   CAGR   reported   at   1.91%,   while  working   capital   liabilities  CAGR   reported   at   0.04%.  Thisis   mainly   due   to   inventories   on   hand   that   the  company  has  to  stores.    

This  is  typical  for  retail   industry  as  it  depends  on  its  operating   cycle.   Retail   companies   often   spend  money  on   inventory   in  advance   to  get   ready   for   its  next   sales   cycle   such   as   holiday   seasons.   With  working  capital  assets  reported  higher  than  working  capital   liabilities,   this   indicates   that   Gap’s   net  working  capital  requirements  to  be  a  use  of  cash,  as  the  company  use  cash  to  purchase  more   inventory  for  advance  sales.    

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Free  Cash  Flow    

It’s   important   to   consider   the   company’s   free   cash  flow   as   it   determines   the   amount   of   cash   that   is  available  on  hand  by  the  company.    

Gap   Inc.   cash   dividends   paid   in   2015   reported   at  $377   million   with   CAGR   of   6.48%   overtime.   The  company   increased   its   dividend   from   $0.88   per  share   in   2014   to   $0.92   per   share   in   2015   and  planned   to   pay   out   dividend   at   $0.92   per   share   in  2016.  By  increasing  its  dividend  paid,  I  assumed  that  the   company   management   is   confident   in   its  liquidity.    

The   company   has   a   net   shareholder   outflows   of  $1,009  million   in  2015.  The   company   took   in  more  debt   in   2015   to   buy   back   its   stock   repurchase,  results  in  an  increase  in  shareholders’  value.    

Cash  Conversion  Cycle  

Cash  conversion  cycle  is  a  measurement  determines  how   fast   and   efficient   can   a   company   be   towards  using  its  short-­‐term  assets  and  liabilities  to  generate  cash.  The   lower  the  number,  the  better   it   is   for  the  company.  

Gap   Inc.   has   increased   in   its   cash   conversion   cycle  since  2008.  The  firm  cash  conversion  cycle  reported  at  -­‐24.20%  in  2008  to  -­‐2.21%  in  2015.  This  is  mainly  due   to   the   increased   in   cost  of   goods   sold.   Though  the  company  has  increased  in  cash  conversion  cycle  

number,  it  still  remains  low,  which  indicates  that  the  firm  is  still  using  its  short-­‐term  assets  and  liabilities  efficiently  to  generate  cash.    

Solvency  

Solvency   ratios  determine  how  much  debt  a   firm   is  holding  and  the  firm’s  ability  to  handle  the  debt.    

Time  Interest  Earned    

This   ratio   is   a  measurement   of   the   firm’s   ability   to  make  its  interest  payments.  The  higher  the  ratio,  the  greater  ability  the  firm  will  be  able  to  pay  its  interest  payment  as  due  time  come.    

In   2015,   Gap   Inc.   reported   time   interest   earned   at  22.96,   lower   compared   to  2014  at  27.84  and  35.51  in   2013.   This   was   due   to   lower   revenues   in   2015  compared   to   previous   years.   Time   interest   earned  for  Gap  Inc.  has  been  staying   low  overtime,  despite  the   soars   in   2008   –   2010   due   to   lower   interest  expense  and  higher  taxes  and  net  income.    

Debt-­‐to-­‐Equity  Ratio  

The  company  debt-­‐to-­‐equity  has  been  going  up  from  0.45  in  2014  to  0.68  is  in  2015  with  total  debt  CAGR  reported   at   65.92%   since   2008.   The   company   is  highly   levered.   This   could   be   worrisome   as   the  company   is   taking   in   more   debt   recently.   The  company  entered  into  a  15  billion  Japanese  Yen  un-­‐secure   term   loan   for   its   plan   to   invest  more   in   the  Japan  market.    

I   think   this   is   a   concern   that   the   company   is  increasing   in   its   debt.   Though   I   believe   that   the  company  takes  in  more  debt  for  its  business  strategy  and  plan  to  expand  to  multiple  countries.  However,  overtime   I   do   not   think   that   they   should   continue  to   take   more   debt   to   fund   for   more   business  expansions  as  they’re  already  highly  levered.    

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Recent   reports   also   showing   that   Gap   has   been  shutting  down  Banana  Republic  stores  in  the  UK,  this  indicates  that  their  plan  did  not  turn  out  to  the  way  they  were  hoping  for.  Gap  should  keep  a  tight  watch  on  its  debt.    

 

Combined  Financial  Leverage  

From  the  graph  shown,  Gap  Inc.  combined  financial  leverage   is   actually   going   at   a   steady   rate,   slightly  increasing   overtime   with   CAGR   of   7.31%.   Though  Gap   Inc.   combined   financial   leverage   is  higher   than  Aeropostale  in  2015,  the  company  still  stayed  rather  similar   to   its   historical   data   and   did   not   increase  much  higher.    

Credit  Ratings  

As  of  January  30,  2016,  Standard  &  Poor’s,  Moody’s  and   Fitch   rate   Gap   Inc.   BBB-­‐,   Baa2,   and   BBB-­‐.  

However,   due   to   weak   sales   during   the   summer  season,   as   of   May   2016,   S&P   downgraded   Gap   to  BB+  and  also  Fitch  downgraded  to  BB+  with  outlook  stable,  as  this  grading  will  remains  for  a  while.    

This   brought   the   company  down  below   investment  grade.  Changes  with  credit   ratings  could  results   the  company   in   change   in   interest   expense   if   draw   on  the  credit  facility  given.    

Summary  of  Short  Term  Viability  

Through   multiple   of   metrics   to   analyze   the  company’s  liquidity  and  solvency,  I  think  that  there’s  a   slight   concern   going   on   with   the   company  financial   leverage  as  the  company  is  taking  in  more  debt   over   time,  whether   for   business   expansion   or  to  buy  back  stocks,  I  think  the  company  needs  to  be  on   a   watch   more   often   with   its   performance   and  activities.    

Overall,   in   a   long-­‐term   run,   I   would   not   be   too  worry  as  the  market   is  predicting  to  go  back  up  for  consumer   discretionary   sector   and   that   more  customers   are   willing   to   spend   more   money   on  discretionary  products.    

Assessment  of  long-­‐term  growth  outlook     For long-term growth outlook, I will be discussing over the top and bottom line growth of the firm.

Turnover  

Revenue  growth  

In   2015,   Gap   Inc.   revenues   decreased   to   $15.7  billion   compared   to   previous   year   at   $16.4   billion.  From  2008  –  2015,  revenue  CAGR  stayed  at  1.21%,  which   is   very   low.  Though  revenue  decreased   in   in  2015,   this  was  mainly  due   to   the   impact   in   foreign  

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exchange   and   economy   condition   for   the   year,   as  consumers   are   cutting   down   on   discretionary  spending,   results   in   a   revenue   deduction   for   the  retail  industry  in  general.    

 

Asset   turnover   ratio   (ATO)  for  Gap   Inc.  reported  at  2.12  in  2015,  remained   in   line  with  2014.  The  retail  industry   tends   to   have   the   highest   ATO   among   the  sectors   due   to   small   asset   bases   and   high   sales  volume.  Compares   to   its   competitors,  Gap  ATO  has  been  higher   than  American  Eagle  and  Abercrombie  &   Fitch   but   remained   lower   than   Aeropostale  overtime.  Gap  ATO  has   remained   over   the  median  of  the  industry.    

This  indicates  good  sign  as  the  company   is  using   its  assets   efficiently   relative   to   its   sales.   I   think   the  company  turnover   is  performing  strong  through  my  analysis.    

 

 

Margin  

Gross  Margin  

Gross  margin  remained  in   line  closely  with  previous  years,  slightly   decreased   by   2%,   reported  at  36.2%  in  2015.  Compared  to  the  industry  gross  margin,  the  company  perform  well  overtime.  Gap  gross  margin  has  been  higher  than  Aeropostale  since  2011  when  Aeropostale  gross  margin  started  to  decreased.    

Net  Margin  

Gap   Inc.   net  margin   dropped   in   2011   to   10%   then  pick  back  up   in  2013  at  around  13%.   I   can   see   that  Gap   net   margin   is   falling   again   down   to   9.74%   in  2015   as   the   company   experience   low   sales.  However,   Gap   net   margin   still   remains   in   good  standing  that  I  do  not  think  that  it’ll  be  a  problem  in  a  long-­‐run.    

Gap   has   higher   and   positive   net   margin   while  Aeropostale   dropped   down   to   negative   margin,  reported  at  -­‐8.18%  in  2015.    

 

 ATO  *  Margin  

For   long-­‐term  growth  outlook,  Gap  has  outstanding  margins.   The   company   ATO   times   Net   Margin  follows  tightly  to  Net  Margin  trend  overtime,  remain  positive  at  20.58%   in  2015.  Gap  Inc.  outperform  its  competitors,   Aeropostale.   Aeropostale   ATO   times  net  margin   also   follows   its   net  margin,   continue   to  drop  into  the  negative.    

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Return  on  Equity    

Gap  ROE   reduced   from   42.3%   in   2014   to   36.1%   in  2015.   I  believe  this   is  mainly  due  to  the  drop  in  net  margin   as   revenues   and   EBIT   decreased.   Though  ROE   didn’t   increase,   I   believe   that   it   will   remains  stable   overtime   and   eventually   will   increase   back  up,  but  at  a  slower  pace.    

The   graph   indicates   that   Aeropostale   ROE  skyrocketed   in   2015.   Typically,   higher   ROE   means  that   a   company   is   profitable.   However,   with  Aeropostale   ROE   soars   into   such   high   percentage  due   to   assessing   ROE   when   stockholder   equity   is  negative.   This   is   actually   not   a   good   sign   for  Aeropostale  as  the  company  is  actually  losing  money  rather  than  generating  profit.    

 

Overall  Summary    

After  the  analysis  with  multiple  metrics  and  ratios  to  assess   Gap   financials,   I   come   to   a   conclusion   that  the   company   will   remain   in   a   positive   condition   in  the  near  future.    

On   the  short-­‐term  viability,   the   firm  can  be  a   slight  worrisome  due  to  being  highly  levered  and  their  CFO  CAGR  remains  low  overtime.  However,  I  do  not  think  that  it  should  be  much  of  a  problem  as  the  company  is  using   its  cash   for  working  capital  needs  and  have  excess   cash   on   hands   in   case   for   any   unexpected  business  downturns.    

For   long-­‐term   growth   outlook,   the   company   has  remained   stable   overtime   and   I   think   the   company  will  continue  to  outperform  year-­‐over-­‐year.  Though  top   and   bottom   lines   didn’t   have   a   strong   growth,  the   company   still   remains   positive   and   either  outperform   or   remains   in   line   with   the   industry  trend.    

Overall,   I   think   the   company   is   in   a   good   condition  that   can   be   improve   in   the   future.   With   more  expansion   to   emerging   markets,   the   company   can  see  higher  growth  in  the  long-­‐run.    

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Forecasting

Revenue  

Revenue   is   a   very   important   factor   to   take   in  consideration  when  projecting  a  company’s  growth.  Gap   Inc.   is  a  mature   firm  that  has  been  established  in   the   industry   for   a   long   time.   The   company  generates   stable   revenue   overtime   and   remains  positive  with   it   financials.  By   forecasting  the   firm’s  revenue,   this   can   help   my   analysis   to   predict   the  growth  for  the  company  in  the  future.    

I   predict   that   Gap   will   experience   revenue   growth  over  the  next  few  years,  however,  will  be  growing  at  a   much   slower   rate.   Recent   earnings   did   not   look  impressive   for   Gap   as   demand   for   Old   Navy   and  Banana  Republic  has  been  trended  downward.    

Gap   revenues   is   being   affected   by   other   retailers  such   as   H&M   and   Zara   as   consumers’   preference  shifted   towards   lower   price   and   fast-­‐fashion  products.      

Buyer  power   takes  a  big  part   into   the  sales  growth  of  the  company  as  demand  for  casual  clothing  styles  has  been  decreasing.  Gap  might   face  a  challenge   in  the  near   future   if   the   firm   cannot   increase  product  innovation   to   attract   its   consumers   back   to   the  business.    

However,   a   factor   that   can  help  Gap   to   increase   in  its  sales  growth  is  to  expand  its  Omni-­‐channels  such  as   ship-­‐from-­‐store,   online-­‐pick   up   services.   Also  focusing   on   online-­‐site   can   help   its   revenue   to   go  back   up   as   this   create   more   efficiency   for   the  consumers   as   well   as   cutting   down   extra   costs   for  the  company.    

 

With   revenue   forecast,   I   predict   that  Gap  will   have  1%   growth   in   new   stores,   1%   growth   Omni-­‐channel,   and   1%   growth   in   revenue   per   square  foot.    

Margins  

Gap   gross   margin   has   been   declined   slightly   from  2014   to   2015   due   to   low   sales   for   the   year.  However,   I   predict   gross   margin   to   remain   in   line  closely  to  its  historical  data.    

Historically,   gross   margin   has   been   average   about  37%,  therefore  I’ll  trend  and  give  gross  margin  of  1%  growth   until   2018   when   it   reached   39%   and  decreased  1%  back  to  38%.    

 

Compared  to  gross  margin  in  percentage,  the  dollar  amount   is   expecting   to   increase   slowly   year   over  year,   forecasted  up   to  2020.  Gap   is  aiming   to  close  more  underperforming   stores  and  will  mainly   focus  on   regional   stores   in   North   America.   The   company  shifts   its   strategy  plan   to   channelizing   its   resources  

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right   and   appropriately   to   the   changes   within   the  fashion  retail  industry.    

 

 

EBIT  

EBIT  Margin   (Table  14)   is   forecasted   to   rise   in   2016  to   2018   at   estimate   of   12.4%,   then   will   eventually  slightly   decreased   back   to   11.0%.   With   positive  margins  and  revenue  growth,  I  predict  that  EBIT  will  maintain  a  stable  growth  in  the  futur.  The  company  will  likely  to  generate  high  revenue  for  the  next  few  year   with   positive   margins   as   operating   expenses  stay  fairly  average  with  historical  data.      

 

Net  Income    

Net  income  in  2015  for  Gap  didn’t  perform  too  well,  they  actually  had  a  decreased  from  $2,129  million  in  2014   to   $1,549   million   in   2015,   with   a   CAGR   of   -­‐0.71%.  Though  my  forecast  is  predicting  for  revenue  growth   to   increase,   as   well   as  margins,   however,   I  am  not  expecting  net   income   to   increase  at  a   fast  pace  in  the  future.    

Low  net  income  results  from  lower  sales  for  the  year  due   to   Gap   announcement   in   early   2015   that   the  firm  closed  down   the  Piperlime  brand,   including   its  online   and   stores   in   New   York.   Cost   of   goods   sold  and   operating   expenses   were   also   affected   by  strategic   actions   that   management   has   that   year,  causing  COGS   to   increase   about   2%   and   operating  expense  increased  1%  as  a  percentage  of  sales.    

 

 

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Balance  Sheet  

Assets  

Gap  total  assets  has  remains  low  overtime.  The  main  drivers  for  the  firm’s  total  assets  are  cash  and  cash  equivalent,  inventory,  and  PP&E.    

With   the   current   strategy   actions   that   Gap   is  planning   to  close  down  underperform  stores,  PP&E  is  not  expecting  to  grow  strong  in  the  future,  and  I  set  my  prediction  at  a  flat  rate  of  31%.    

 

Inventory  is  expecting  to  rise,  this  is  understandable  as  a  retail  company,  Gap  would  need  an  appropriate  amount  of  inventory  on  hand  for  advance  sales.    

With  the  company  strategy  plan  to   focus  on  mainly  North  America   segments,   I   do   not   think   that   their  total   assets   will   grow   as   fast   since   they   are   not  planning   to   expand   anytime   soon.   Therefore,   my  forecast   indicates   that   Gap   total   assets,   though  

increase,  will   remains   low   compare   to   its   historical  trend.    

Income  Statement  

Accounts   payable   and   other   short-­‐term   liabilities  are   projects   to   increase   from   2016   –   2020.   I   used  the  percentage  of  cost  of  goods  sold  and  expenses,  which  average  to  15%,  used  as  a  flat  rate.    

As   stated   with   Gap   planning   to   focus   on   regional  segment  only,  I  expect  for  the  company  debt  to  be  lower   in   the   future   as   they   do   not   have   any  expansion  any  time  soon,  this  can  help  reduce  costs  and   reduce   their   debt.   With   the   forecast,   average  Debt  to  Equity  ratio   is  at  0.38,  2015  reported  ratio  at   0.68.   Based   off   that   information,   I   predict   the  debt  to  reduce  to  0.58  overtime.    

Ratios  

Asset  Turnover  

Compared  to  its  competitors,  Gap  has  a  strong  asset  turnover   in   2015,  as  well  as   remain  above   industry  average   overtime.   I   predict   that   this   trend   will  maintain   stable   at   a   rate   above   2.50   for   the   next  few  years  unless  new  strategy  plan  takes  place  such  as   new   acquisition   or   new   expansion,   which   most  likely  will  not  happen  any  time  soon  for  Gap.    

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ATO  *  Margin  

As   forecasted   asset   turnover   to   stay   moderately  stable   and   net   margin   slightly   decrease,   I   would  predict   ATO   times   margin   to   decrease   slightly   as  well.   Though   it   will   increase   between   2015   and  2018,   it   will   continue   to   drop   after.   As   the   growth  isn’t  as  strong,  it  still  being  forecasted  higher  than  its  historical  trend.    

Return  on  Equity  

Gap’s   ROE   has   been   steadily   rising   over   the   year,  following  the  trend  of  its  historical  data,  I  predict  for  ROE   to   also   continue   to   increase   for   the   next   few  years.    

Gap   maintains   a   stable   tax   impact   overtime,  reported   at   around   62%   in   2015,   compared   to  Aeropostale   which   tax   impact   was   reported   above  100%.   A   stable   tax   impact   will   lead   Gap   to   an  increase  in  ROE  in  the  future.    

Earnings  per  Share  

Earnings   per   Share   also   an   indicator   of   the   firm’s  profitability.   The   higher   the   share,   the   more   the  stock  will   be  worth   that   can   results   in   higher   value  for  the  company.  With  Gap  EPS  has  been  increasing,  I  predict  for  its  EPS  to  continue  to  rise  and  remains  above  3.00  

Dividend  per  Share    

The   company   paid   out   dividend   of   $377   million   in  2015,   a   $8   million   decreased   from   2014.   I   predict  the  company  to  continue  paying  out  dividend  in  the  

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future.  Dividend  paid  out  will   continue   to  decrease  in  2016  and  will  eventually  increase  back  up.    

 

Forecast  Overall  

Based  off  the  forecast,  Gap  looks  like  it  is  going  in  a  good   direction   for   future   growth.   After  management   strategy   planned   to   shut   up   down  underperform  stores,  this  can  actually  help  boost  up  the   company   growth   by   cutting   down   costs   and  perform   a   more   efficient   management   that   could  lead  the  firm  into  a  fast  growing  pace  compare  to  its  slow  growth  at  the  moment.    

I  also  believe  that  the  consumer  discretionary  sector  will  rise  back  up  as  more  consumers  will  have  excess  cash,   which   willing   to   pay   for   more   discretionary  items.    

Overall,   I   think   Gap   Inc.   is   still   in   a   good   standing  and   has   the   potential   to   growth.  A   factor   to   take  into   consideration   is   the   buyer   power,   as   the  company   is   depending   on   consumers’   preference  and  needs  in  order  to  outperform  its  growth.    

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Discount Rate

  In   order   to   perform   a   valuation   on   a  company,   I  must   first   determine   the   discount   rate.  The   most   common   method   used   is   called   Capital  Assets   Pricing  Model   (CAP-­‐M).   CAP-­‐M   is   comprised  of  three  factors:  

1. Risk-­‐free  Rate  2. Market  Risk  Premium  3. Beta  

I   will   be   discussing   these   three   factors   in   this  analysis.    

Risk-­‐free  Rate  (3.86%)  

The   Risk-­‐free   Rate   determines   the   rate   of  return   the   investor   is  able   to   receive  without  being  affected   by   any   risk.   Two   common   ways   to  determine  the  Risk-­‐free  rate  is  to  use  the  current  10-­‐year  treasury  yield  or  the  normalized  approached.    

The   10-­‐year   treasury   yield   has   been   low   at   around  2%.   I   decided   to   use   the   normalized   method,   as   I  believe  it  will  provide  more  of  an  accurate  result  for  the   risk-­‐free   rate  as   it   considers  productivity,   labor  growth,  and  expected  inflation.    

The   Current   Treasury   Yield   has   been   too   low  compared   to   its   average   overtime  of   5%  or   higher.  By  using  low  risk-­‐free  rate,  I  believe  it  could  result  in  a  higher  valuation  towards  the  company.      

Normal  Real  Rate  (3.0%)  

The  Normal  Real  Rate   is  equal  to  the  Expected  Real  GDP  growth,  which  contained  expected  productivity  and  expected  labor  growth.    

I   will   give   an   estimation   for   2%   for   expected  productivity,   considered   that  productivity  has  been  

in  a  slow  pace  and  was  also  reported  with  a  reduced  rate  in  the  third  quarter  of  2016.    

 Expected   productivity   and   expected   labor   growth  usually   offset   one   another,   with   productivity  declining,   labor   might   see   potential   growth.  However,   I   still  believe   that  expected   labor   growth  rate  to  be  at  1.0%.  

Expected  Breakeven  Inflation  (1.86%)    

By   bootstrapping   the   10   year   and   5   year   treasury  yield  given  from  the  Federal  Reserve  to  the  Forward  5   year   Nominal   and   TIP,   the   expected   breakeven  inflation  would  be  calculated  at  1.86%.  

Normalized  Risk-­‐free  Rate  (3.86%)  

Normalized risk-free rate can be computed by:

= (Normal Real Rate + Expected Inflation) – 1%

Adding   Normal   Real   Rate   and   Expected   Inflation  together   and   less   1%   will   results   in   a   normalized  risk-­‐free  rate  of  3.86%  compared  to  current  10-­‐year  treasury  yield  of  1.83.    

Market  Risk  Premium  (3.04%)  

The   market   risk   premium   applies   to   all  stocks   on   the  market,   to   determine   the   return   the  investor   is   able   to   receive   being   exposed   to   the  stock  market  risk.    

According   to  Dr.  Damodaran’s   article  on  Equity-­‐risk  Premium   (ERP),   there   are   three   approaches   to   go  about  calculating  ERP.  However,  they  can  also  result  in  different  values.    

• Surveys  • Historical  Premium  • Implied  Approach  

Surveys:   This   method   is   being   calculated   by   asking  investors   and   analysts   for   their   opinions   of   what  they   think   the   future   stock   returns   would   be   and  

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then  net  out  the  risk-­‐free  rate  to  get  the  result.  Dr.  Damodaran  disagrees  with  this  method  and  I  also  do  not   believe   this   approach   can   generate   accurate  information.  The  surveys  approach  represents  more  of  the  past  rather  than  the  future  and  also  investors  or   analysts   could   be   optimistic,   leading   to   more  hopes  more   than   expectations   of   wha\t   the   actual  future  stock  returns  could  be.    

Historical   Premium:   This   approach   uses   historical  data   to  predict   the  premium  earned  by   investing   in  stocks  over  a  risk  free  investment.  I  will  not  be  using  this  approach  as  I  believe  by  basing  our  assumption  solely   on   just   historical   data   will   not   give   us   an  accurate   valuation.   The   rise   in   globalization   and  rules   changed   overtime,   historical   data   will   not  take  the  new  rules  into  consideration.    

Implied  Premium:  This  approach   is  being  calculated  based   upon   the   price   pay   and   the   expected   cash  flows  on  stocks,  dividends  and  buybacks.  I  think  the  implied  approach  makes   the  most   sense  out  of   the  three.  The   calculation   is  being   computed  at   future  numbers   (expected   cash   flow)  and   it   is   also  based  off  the  money  paying  for  stocks  today.  Therefore,  I  believe   that   this   approach   will   give   me   a   better  valuation  and  better  results.    

Implied  approach  

Market  risk  premium  can  be  calculated  by  using  the  implied  approach:    

=  Expected  Return  on  Stocks  –  The  Risk  Free  Rate    

 

Expected  Return  on  Stocks      

Expected  return  on  stocks  can  be  calculated  by:    

=   Current   Dividend   Yield   +   Expected   Earnings  Growth  

Current   dividend   yield   is   based   off   the   market.  Therefore,   I  will  be  using  the  S&P500   (SPY)   current  dividend  yield  at  2.04%.    

Expected   earnings   growth   is   the   Nominal   US   GDP  Growth,  which  consisted  of  Productivity  (2%),  Labor  Growth  (1%),  and  Inflation  (1.86%),  results  at  4.86%.  

Adding   two   factors   together  will   give   the  expected  return  on  stocks  at  6.90%.      

With  expected  return  on  stocks  at  6.90%  and  the  risk-­‐free  rate  of  3.86%,  I  calculated  the  market  risk  premium  to  be  at  3.04%  (6.90%  -­‐  2.04%).        

Beta   When  determining  a  company’s  beta,  there  are  four  key  factors  to  take  into  consideration:  

• Revenue  Sensitivity  • Operating  Leverage  • Financial  Leverage  • Historical  Data  

 Revenue  Sensitivity  

Based   off   the   revenue   chart   above,   Gap   seems   to  react   alongside   with   many   financial   impacts  overtime.  For  example,  revenue  dropped  during  the  2007-­‐2009   recession.   This   is   understandable   as  consumer   discretionary   sector   is   highly   sensitive   to  the   market.   When   the   economy   condition   is   not  performing   well,   consumers   will   cut   down   on  unnecessary  needs  and  vice  versa.    

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I   will   assume   that   Gap   will   have   a   high   level   of  revenue   sensitivity,  more   likely  with  beta   above   1,  indicating  a  cyclical  stock.  

Operating  Leverage  

Gap   has   high   fixed   costs,   which   includes   a   large  amount   of   furniture   and   equipment,   lands   and  buildings,  and  construction  in-­‐progress.  The  firm  has  a   decent   gross   margin   standard   deviation   rank   in  the   top   37.4%  with  net  margin   standard  deviation  rank   in  the  top  27.3%.  Gap’s  gross  margin  standard  deviation  reported  at  2.68  compared  to  the  market  at  3.70.  Net  margin   standard   deviation   reported   at  3.02,  also  lower  compared  to  the  market  at  5.87.    

Smaller  standard  deviations   indicate  a  good  sign  as  the   data   are   being   clustered,   closer   to   the   mean,  which   is  more  reliable.   I  would  give  an  estimate  for  beta  to  be  1.    

 

 

Financial  Leverage  

Looking   at   Gap   debt   to   equity,   the   firm   currently  holds   a   lower   debt   compared   to   the   market,  reported   at   45.36   vs.   the   S&P500   at   57.88.   This  indicates   that   the   company   isn’t   as   highly   levered  compare   to   the   market   benchmark.   I   would  conclude  the  beta  for  this  to  also  be  at  1.    

 

 

Historical  Data  

I   computed   a   Rolling   3   year   Beta   from   Gap   Inc.’s  historical  prices.  From  the  graph  below,  we  can  see  that  the  beta  has  been  alongside  with  the  historical  data,   slightly   above   1   from   2005   to   present.   Based  off  the  historical  beta,   I  would  estimate  the  beta  to  be  slightly  above  1.      

 

Beta  Assumptions  

Revenue  Sensitivity   Above  1  Operating  Leverage   1  Financial  Leverage   1  Historical   Above  1   After   analyzing   all   the   key   factors   and   taking   into  consideration  the  level  beta  for  each,  I  will  conclude  my  assumption  for  base,  best,  and  worst  scenarios.    

Base  (1.15)  For  base  scenario,  I  would  assume  Gap  Inc.’s  beta  to  stay  above  1.  I  would  give  an  estimate  of  the  beta  to  be  1.15  

S&P  500GPS  UN  Equity Rank

Median 3.70             2.68                 37.4%90  Precentile 14.78        10th  Percentile 1.17             Table  38

S&P  500GPS  UN  Equity Rank

Median 5.87             3.02                 27.3%90  Precentile 79.38        10th  Percentile 1.54             Table  39

Gross  Margin  Standard  Deviation  (%)

Net  Margin  Standard  Deviation  (%)

S&P  500GPS  UN  Equity

Rank

Median 57.88         45.36             42.9%90  Precentile 267.87    10th  Percentile -­‐                 Table  40

Debt  to  Equity

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Best  (Low  at  1)  Best  case  scenario  is  when  the  beta  is  low,  indicating  that   the   firm   is  not  highly   levered.   I  would  give   the  lowest  beta  assumption  to  be  1.    

Worst  (High  at  1.55)  Based   off   the   historical   data,   Gap   has   experience  high  degrees  of  beta  before  reaching  beta  of  1.50  or  even   above   2   back   in   1990.   I   would   assume   the  worst  case  scenario  beta  could  rise  to  1.55  

Discount  Rate  Combining Risk-free Rate, Market Risk Premium, and Beta together will results us in Discount Rate Normalized below:

SCENARIOS   DISCOUNT  RATES  BEST  (1)   6.90%  BASE  (1.15)   7.36%  WORST  (1.55)   8.57%  

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Growth Rate Determination and Valuation

Three  models  I  will  be  using  to  determine  the  stock  value:    

1. Dividend   Discount  Model   (Gordon   Growth  Model)  

2. Capitalized  Earnings  Model  3. H-­‐Model  

I   believe   these   three   models   are   suitable   for   Gap  stock  valuation  due   to   the  company  pays  dividends  and   these   models   will   be   taking   dividend   and   EPS  into  consideration.    

In   previous   section,   I   have   determine   the   Discount  Rates  for  three  scenarios  which  are:  

SCENARIOS   DISCOUNT  RATES  BEST  (1)   6.90%  BASE  (1.15)   7.36%  WORST  (1.55)   8.57%    

I  will  be  using   the  assumed  discount   rates  and  also  several   more   assumptions   for   the   company  valuation.    

Growth  Rate  

  Before  valuating  the  company,   I  will  discuss  the   short-­‐term   and   long-­‐term   growth   rate   for   the  three  scenarios.  

  In   previous   section   (Industry   Analysis),   the  U.S.   apparel   industry   reported  CAGR   of   3.2%   from  2011   to   2015.   The   industry   has   remain   a   stable  growth  for  recent  years  and  is  projected  to  increase  moderately   up   to   2020.   Based   off   my   industry  forecast,   I   believe   that   retailers   are   looking   for  stronger   growth   in   upcoming   years   due   to   higher  consumer   demand.   Globally   speaking,   the   apparel  industry  is  looking  at  a  CAGR  of  5%  or  above.    

  Historically,   Gap   has   reported   CAGR   of  1.75%  overtime,  this  is  relatively  low.  However,  they  still   report   positive   earnings   with   stable   growth  overall.    

Short-­‐term  Growth  Rate:     To   calculate   the   short-­‐term   growth   rate,   I  will  considered  three  approach:  

• PEG  Ratio  • Sustainable  Growth  • Historical  Growth  

PEG  Ratio:    Using  Trailing  P/E  Ratio  of  14.90  (yahoofinance)  and  PEG   Ratio   of   3.02   (yahoofinance),   calculating   that  together  will  give  a  short-­‐term  growth  rate  of  4.9%  (14.90/3.02).    

Sustainable  Growth:    Sustainable   growth   rate   can   be   determine   by  calculating  ROE  *  Retention.      

The  firm’s  company  ROE  reported  at  36%.  Retention  can   be   calculated   by   using   Dividend   paid   and   EPS.  The   Company’s   dividend   is   0.92   and   EPS   is   2.41.  Retention  would  be  61.8%  (1-­‐0.92/2.41).    

ROE  *  Retention  =  22%  sustainable  growth.  

Historical  Growth:    Using   Bloomberg   trailing   12   months   EPS   and  calculating  it  at  3,  5  and  10  years  growth,  the  graph  shows   that   EPS   growth   for   Gap   remained   stable  overtime.  The  historical  data  indicates  that  Gap  EPS  

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growth  reported  in  the  7%  to  13%  growth  range.    

 

The   firm   reported   CAGR   of   1.75%   overtime   from  2011   to   2015.   However,   the   firm   is   predicting   to  have  a  moderate  growth  in  the  next  few  years  as  the  industry  is  also  expecting  for  higher  growth.    

I   would   assume   the   company   short-­‐term   growth  rate  to  be  at  4%  at  base  scenario.  I  would  give  short-­‐term  growth  rate  of  1.5%   for  worst  case  scenario   if  the   company   underperform   due   to   drop   in  consumer  demand.  Best  case  scenario  would  predict  to  be  at   6%   if   the  economy  condition   is  performing  well   and   more   consumers   are   willing   to   spend   on  apparel  and  accessories  products.    

 

Long-­‐term  Growth  Rate  For   long-­‐term   growth   rate,   it’s   usually   can   be  predicted  by  using  the  same  rate  to  match  Nominal  GDP   rate.   However,   I   would   assume   that   Gap   Inc.  long-­‐term   growth   rate   will   be   lower   due   the   slow  growth   in   the   industry   overall   as   well   as   the  company’s   slow   growth   on   sales.   I   would   assume  the   rate   to   be   at   3%   base   growth   to   match   the  Nominal  GDP  Growth.  I  will  also  give  a  worst  case  of  1.5%  and  best  case  of  4.5%.    

Time  period  from  ST  to  LT  Growth  Gap  has  been  consistent  with  their  growth  overtime.  The   apparel   market   also   performs   moderately,  remain   in   trend   line   with   their   historical  performance.  I  will  give  an  assumption  that  it  would  take   2   years   to   get   from   ST   growth   to   LT   growth.  That  would  results  in  a  half  life  of  1  year.    

 

  BEST   BASE   WORST  RF   3.86%   3.86%   3.86%  ERP   3.04%   3.04%   3.04%  BETA   1.15   1   1.55  KE   6.90%   7.36%   8.57%  ST  GROWTH   6%   4.0%   1.5%  LT  GROWTH   4.5%   3%   1.5%  

 

Dividend:  $0.92  EPS:  $2.41  Inflation:  1.86%  H:  1  year  

Models  

Dividend Discount Model This  model  works  well   for  Gap  as   the   firm  pays  out  dividend.   The   DDM   only   assume   one   growth   rate  thus  I  believe  this  wouldn’t  be  a  problem  for  Gap  as  the  firm  has  a  stable  growth  over  time.  

Dividend  Discount  Model  =  (Div0  *  (1  +  LT  Growth))  /  (ke  –  LT  Growth)    

Best  Case:  $33.62  

Base  Case:  $21.73  

Worst  Case:  $15.94  

 

Capitalized Earnings Model This  model  was  proposed  by  Professor  Ronald  Sweet  to  assume  a  firm  pays  out  all  earnings  and  retain  0%.  However,   this   model   assumes   to   grow   with   only  inflation  and  does  not  take  ST  growth  and  LT  growth  into  consideration.  I  am  disagree  with  this  model  as  I  believe  it  might  not  be  as  accurate  if  only  depends  on  inflation.    

Capitalized  Earnings  Model  =  (EPS0  *  (1  +  Inflation))  /  (ke  –  inflation)  

Best  Case:  $48.71  

Base  Case:  $44.63  

Worst  Case:  $36.58  

H-Model The   H-­‐Model   approach   assumes   both   ST   and   LT  growth   into   its   formula.   The  model   expected   to   ST  growth   to   be   at   a   fast   pace   and   high   growth,   then  will   eventually   slow   down   and   remain   in   line   with  

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the  economy  for  its  LT  growth.  This  model  seems  to  work  well  for  Gap  as  the  apparel  retail  stocks  remain  stable  throughout  time  based  on  its  historical  data.    

H-­‐Model=   (Div0  *   (1   +   LT  Growth)   +  Div0  *  H  *   (ST  Growth  –  LT  Growth))  /  (ke  –  LT  Growth)  

Best  Case:  $34.10  

Base  Case:  $21.94  

Worst  Case:  $15.94  

 

Gap  Valuation     Best   Base   Worst  DDM   $33.62   $21.73   $15.94  Cap  Earnings   $48.71   $44.63   $36.58  H-­‐Model   $34.10   $21.94   $15.94  Median   $34.10   $21.94   $15.94  Average   $38.81     $29.43   $22.82    

Current  Price  (as  of  12/1/2016):  $25.67  

Recommendation     After   evaluating   the   stock   using   the   three  models,   the   DDM   and   H-­‐Model   indicated   that   Gap  Inc.  to  be  slightly  overvalued.  The  price  reported  at  $25.67   (as   of   12/1/2016),  which   is  more   expensive  than  the  base  price  for  DDM  and  H-­‐Model.    

As   stated   above   that   I   disagree   with   the   Cap  Earnings   model   because   I   believe   that   by   taking  solely   inflation   into   account   will   not   be   able   to  provide  an  accurate  valuation.  And  we  can  see  from  the   Cap   Earnings   model   that   base   price   is   $44.63,  which   indicates   that  Gap   Inc.   stock  price   is   actually  cheaper.    

Based  on   the   three  models,   I  would   recommend  to  hold   the   stock.   However,   more   valuations   will   be  discuss  further  in  later  sections  to  conclude  a  sound  recommendation.    

 

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Relative Valuations

To   go   more   in   detail   and   to   better   our  valuation   of   Gap   Inc.,   I’ll   be   focusing   on   relative  value   analysis.   Relative   Value   Analysis   is   an  approach  to  compare   the  current  measure  value  of  a   company   to   certain   underlying   fundamental  factors.   This   is   to   help   comparing   the   company’s  value   to   the   overall   market   value,   to   determine  which  companies  within  the  industry  are  “cheap”  or  “rich”,   and   where   Gap   Inc.   stands   in   the   ranking  model.    

I  will   be   comparing  Gap   Inc.   ratios   to   the  S&P   500  index,   the   S&P   Consumer   Discretionary   index   and  the  Specialty  Retail  and  Textiles,  Apparel  &  Luxury  Goods  industry.    

To   value   the   companies  within   the   sector,   I  will   be  using   the   ratios   below   to   address   and   compared  whether   Gap   Inc.   is   overvalued   or   undervalued  relative  to  the  industry  and  the    market  overall.    

• Price  to  Earnings  • EV  to  Sales  • Price  to  Cash  Flow    

Price  to  Earnings  Looking   at   the   historical   PE   ratio   of   Gap   Inc.  compared   to   the  S&P  500   index,  we  could   see   that  before  the  financial  crisis  in  2008-­‐2009,  Gap  Inc.  was  above  the  market  trend.  However,  during  the  crisis,  the   firm   PE   ratio   dropped   significantly   lower   than  the   market.   This   is   reasonable   due   to   consumers  were  cutting  down  on  spending  overall.    

Gap   Inc.   PE   ratio   rose   back   up   in   2012   as   the  economy   started   to   go   into   the   recovery,   however  from   2013   to   present,   the   PE   ratio   has   been  

underperform   compared   to   the   market.   This  indicates   that   Gap   Inc.   is   being   undervalued  compared  to  the  overall  market.    

 

The   graph   below   shows   the   firm   PE   ratio   in  comparison   to   the   consumer   discretionary   sector  and   the   apparel   retail   industry.   In   2008,   the  consumer  discretionary  sector  reported  at  a  high  PE  ratio,   however,   this   is   not   from   the   apparel   and  clothing   industry.   The   high   PE   ratio   was   from   auto  parts  &  components  segment.    

Looking   at   Gap   compared   to   the   apparel   retail  industry   PE   ratio,   Gap   actually   performed   better  during   the   financial   crisis.   However,   overtime,   the  firm  still  underperform  compared  to  the  sector  and  

industry  ratio.    

 

From   previous   analysis,   Gap,   although   has   positive  earnings,   has   actually   been   decreasing   slightly   on  revenue   overtime   and   are   forecasting   for   either  

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slow   growth   or   stable   growth   for   long   term.   With  the  PE  ratio  underperform  compared  to  the  industry  and   overall  market,   I   am   confident   to   say   that   the  stock  is  not  being  undervalued  by  the  market.    

EV  to  Sales    Gap   Inc.   has   EV   to   Sales   reported   lower   than   the  overall   market   overtime.   With   recent   years   from  2013   to   2016,   the  market   EV   to   Sales   has   actually  been  increasing.  However,  compared  to  the  market,  Gap  Inc.  is  actually  slowing  down  on  its  EV  to  Sales.  This   could   be   a   sign   that   the   company’s   forecast  revenues   could   potentially   decrease   in   upcoming  years  rather  than  increasing.    

 

Post   financial   crisis,   Gap   Inc.   did   not   remain   in   the  trend   line   with   its   sector   and   the   industry.   During  2009,  Gap  EV  to  Sales  dropped  while  the  sector  and  industry   were   rising.   Up   to   2016,   Gap   still   being  undervalued   significantly   low   compared   to   the  industry  and  sector,  overall.    

Price  to  Cash  Flows  

Gap   Inc.   has   remained   in   line   with   the   overall  market  up  until  2014  when  the  company  performed  lower   P/CF   compared   to   the   market.   This   could  indicates   that   the  company  was  being  traded  fairly,  however   transitioning   to  being  undervalued   for   the  recent   years.   For   company   that   pay   dividend   yield  

like   Gap,   it’s   important   to   take   cash   flows   into  consideration   as   investors   pay   attentions   for   a  strong  cash  flows.    

 

Comparing   to   the   sector   and   the   industry,   the   firm  has   remained   in   line   for   the   historical   data   and  declined   from   2013   going   forward.   The   sector   and  industry  also  appeared  to  be  declining  in  the  recent  years   for   its   price   to   cash   flows.   This   could   mean  that   other   firms   are   also   looking   into   their   cash  balance  to  pay  their  investors  as  the  firm  cash  flows  did   not   meet   expectation   in   able   to   pay   the  

investors.    

 

Ranking  Model    

For  my  analysis,  I  will  be  using  the  ranking  model  to  evaluate  Gap  Inc.  against  the  market  to  determine  if  the  company  is  being  value  as  cheap  or  rich  stock.    

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I   retrieving   data   from   Bloomberg   with  approximately   90   companies   under   the   Special  Retail   and   Luxury   Goods   Industry.   To   create   the  ranking   model,   I   took   in   fundamental,   risk,   and  

valuation  factors.    

 • Fundamental   contained   Asset   Turnover,  

EBITDA   Margin,   and   Sales   3   year   Average  growth.    

• Risk   contained   Total   Debt   to   EBITDA,  Bloomberg   5   year   Default   Probability,   and  Volatility  90  Days.    

• Valuation  consisted  of  PE  Ratio,  EV  to  Sales,  and  Price  to  Cash  Flow.    

Instead   of   running   a   regression   analysis,   I   analyze  my   model   by   using   correlation   to   rank   my   model  

against  the  market  ranking  model.  I  also  used  Solver  in   Excel   to   seek   for   an   optimize   solution   for   the  weighted  ranking.  The  correlation  came  out  to  86%,  which  is  equivalent  to  about  74%  R-­‐Squared.    

For   fundamental,   the   model   is   really   favorable   of  EBITDA  Margin,  which  it  weighted  this  factor  heavily  at  52%.  Allocation  for  risk   factors  scatter  and   is  not  weighted   high   due   to   the   industry   is   low   on   debt  overall.  Lastly,  the  model  is  really  in  favorable  of  EV  to   Sales,   which   weight   it   at   80%.   Based   off   my  model,  Gap   rank  at  53,  while   the  market  placed   it  at  55.    

The   graph   above   is   based   off   my   model,   which  indicates  the  y-­‐axis  to  being  my  ranking  and  x-­‐axis  to  be   the   market   ranking.   Companies   that   are   above  the   line   are   indicate   to   be   cheaper   stocks   and  

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companies   under   the   slope   are   to   be   indicate   as  expensive  stock.    

Gap   Inc.   remained  above   the   line,   the  graph  shows  that   the   company   is   being   undervalued   slightly  compared  to  the  market.    

Forecast  P/E  To   calculate   the   target   P/E,   I   will   be   using   the  formula:    

Target  PE  =  Payout/(ke  –  g)  

I  will  be  using  the  same  ke  and  terminal  growth  from  the   Discount   Rate   Determination   section   to  calculate   the   target   prices   for   three   different  

scenarios.    

   

I  used  5-­‐year  EPS  of  $3.26  which  is  being  forecasted  in   previous   section   to   indicate   the   target   price   for  Gap  Inc.    

From  the  chart  above,  the  base  target  price  is  expect  to   be   at   $18.13   for   Gap   Inc.   The   firm   is   currently  being   traded   at   $25.67   (12/1/2016).   In   the   near  future,   I  would  assume   the   company   stock  price   to  decrease.  However,  best  case  Gap  could  increase  to  $30.57,  or  worst  to  $11.98    

Valuation  Based  off  my  relative  analysis,   I  can  see  that  Gap   is  slightly   being   undervalued   by   the   market   when  comparing   the   key   fundamental   factors.   However,  with   my   growth   rate   valuation,   my   calculation   is  

indicating   that   the   stock   is   being   traded   a   little  higher  than  the  market.    

Relating   to   the   relative   analysis,   Gap   Inc.   hasn’t  been   having   a   fast   growth   within   its   earnings.   The  firms   performed   stable   overall   thus  with   very   slow  growth  overtime.  The  historical  data  shows  that  Gap  has  remained  underperform  compare  to  the  market,  which  is  normal  for  the  company.    

I  am  confident  to  say  that  Gap  Inc.   is  actually  being  traded   fairly   comparing   to   the   market.   Gap   stock  price   is   not   cheap   nor   rich,   therefore,   my  recommendation   would   be   to   hold,   taking   my  forecast   into   consideration   that   the   market   is  expecting   for   stronger  growth  within   the   consumer  discretionary  sector  in  the  futures  upcoming  years.    

Keys Base Best WorstPayout 28% 28% 28%ke 7.36% 6.90% 8.57%Growth 3.00% 4.50% 1.50%Target  PE $6.33 $11.50 $3.915Y  EPS $3.26 $3.26 $3.26Target  Price $18.13 $30.57 $11.98

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Technical Analysis

Daily  Moving  Averages  

The  graph  above   is  retrieved  from  Bloomberg  using  daily  moving  average  of  50,  100,  and  200  days  based  off  3  years  historical  data.  For  the  moving  averages,  it  will  suggests  a  buy  opportunity  if  the  firm  price  is  above  50  day  average  which   is   above  100  day,  100  day  to  be  above  200  day  average  and  if  all  are  rising.  On   the  other  hand,   if   the  50  day  crosses  under   the  100  and  200  day,  a  strong  sell  would  be  suggested.    

 

Prior   to   June   2015,   the   daily   moving   averages  fluctuated  with   the   3   averages   remained   closely   to  each  other.  Starting  from  June  2015  to  end  of  March  2016,   the   50   day  moving   averages   has   been  below  the   other   two   moving   averages,   showing   a   strong  sell   recommendation   for   the   company.   The   price  dropped   from   approximately   $42   in   June   2015   to  about  $25  in  March  2016.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From   November   2016   till   present,   Gap   price   is  currently   under   the   50   day   average   and   above   the  100   and   200   day   average.   The   company   price   has  been  flat  from  September  2016  till  now  and  I  would  assume  that   the  company  will   remain   flat   for  some  times  as  I  do  not  see  any  changes  soon  for  the  trend.    

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I   would   suggest   to   hold   the   stock   for   the  moment  because  the  trend  line  is  neutral.    

Relative  Strength  Index  (RSI)  

 

 

 

 

 

 

RSI   is   another   method   for   technical   analysis,   to  measures  the  speed  and  change  in  price  movement  of  the  company’s  stock.  RSI   is  range  between  0  and  100,   this   method   considered   a   stock   to   be  overbought   when   is   above   70   and   oversold   when  below  30.    

During   2015,   Gap’s   RSI   has   remained   near   the   30  trend   line   until   2016   where   it   fluctuates   more.  During   March   to   August   of   2016   where   it   range  above  70  and  dropped  down  to  below  30  at  another  month,   then   went   back   up   to   above   the   70.   This  could  be  based  on  seasonal  and  holiday  sells.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From  September  2016,  the  company  has  remain  on  the   70   line,   indicating   that   the   stock   is   being  overbought.   Currently   in   December   2016,   Gap   is  dropping   down   from   its   overbought   status,   staying  between   the   30   and   70   range.   This   indicates   a  neutral   signal.  

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Ichimoku  Clouds  

The   last   method   I   will   be   using   is   the   Ichimoku  Clouds.  This  method  follow  a  trend  that  focus  on  the  Cloud   (blue   shaded   area)   and   momentum   signals  focus  on  the  turning  and  base  lines.    

Based  off  stockcharts.com,  some  bullish  and  bearish  signals   to   look   at   within   the   Ichimoku   Clouds  method  are:    

Bullish  Signals:  

• Price  moves  above  Cloud  • Price  moves  above  the  Base  Line  • Conversion  Line  moves  above  the  Base  Line  

Bearish  Signals:    

• Price  moves  below  Cloud  • Price  moves  below  the  Base  Line  • Conversion  Line  moves  below  the  Base  Line  

In   the   beginning   of   2016,   during   February   till  beginning  April,  the  price  remained  above  the  Cloud  with   its   conversion   line   (purple   line)   stayed   above  the  base  line  (yellow  line).  However,  in  April  through  June,   I   can   see   that   Gap   price   dropped,   moved  below  the  Cloud  with  Conversion   line  moved  under  Base  line,  showing  bearish  signal.    

 

 

 

 

From   October   till   November   2016,   Gap   price   has  moves   above   the   cloud   showing   a   bullish   signal.  Currently,  the  company  price  actually  moves  within,  slightly   above   the   Cloud.   However   the   Conversion  line  moves   below   the   base   line   triggered   a   bearish  signal.    

Conclusion:    

From  the  three  technical  analysis,   it  has  shown  that  Gap  Inc.  is  neither  showing  a  bullish  or  bearish  signal  on   the   average   trend.   I   would   assume   that   Gap   is  neutral   at   the  moment   as   it   doesn’t   show  a   strong  momentum   for   a   buy   recommendation   nor   sell,   it  has  moves  within  the  range  for  three  analysis.    

For   technical   analysis   and  based  off   the   valuations,  my  recommendation  is  to  hold  the  stock.