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Gap, Inc.

Gap, Inc. (GPS $18.00) Christopher Letts, Kevin Smith, and Brian Burnham. Tonight’s Objectives. Overview of GAP Inc. Industry Overview Competition Growth Prospects Concerns Recommendation. Company Overview.

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Gap, Inc.

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  1. Gap, Inc. (GPS $18.00) Christopher Letts, Kevin Smith, and Brian Burnham

  2. Tonight’s Objectives • Overview of GAP Inc. • Industry Overview • Competition • Growth Prospects • Concerns • Recommendation

  3. Company Overview • Gap Inc. is one of the largest specialty retailers in the world. Gap Inc. operates four well known clothing brands. • Gap, Banana Republic, Old Navy, Forth & Towne • Founded in 1969 in San Francisco • More than 3,000 Stores worldwide (2800 stores in the U.S., 250 Stores in Europe, German, and Japan) • Mission: Gap Inc. is a brand-builder. We create emotional connections with customers around the world through inspiring product design, unique store experiences and compelling marketing.

  4. Company Overview • Focus on continuing to expand market • Forth and Towne brand introduced in 2004 targeting women over the age of 35 • Focus on cost control • Clothing is made through a 5 phase process • Design and Merchandising,Planning and Sourcing,Production and Marketing,Distribution, Sales and Analysis

  5. Company Overview

  6. The Competition • Large market of retail stores • Abercrombie and Fitch; Limited; Express; American Eagle, etc. • Comparing Gap to the competition: • Last month all retail sales were down. Gap sales were down 3% however comparable stores were down 6%

  7. Industry Overview

  8. Industry Overview • Specialty Retail Stores • Very large, Near saturation • Retail stores are very abundant in the U.S. market place and have experienced slowing sales the past couple years

  9. Growth Prospects • Gap is currently at the lower end of its 52wk range. • Current Price around $18.00; Target Price $23.50 • Projected 10% range growth over next several years • Company has large cash balance • Tremendous free cash flow provides the company with flexibility regarding its strategic long-term options and make the shares compelling from a dividend, free cash flow and balance sheet perspective.

  10. Prospects (contd.) • New line still unproven • Fourth and Towne line just released targeting baby boomer women, ages 35+, market untested • Should have debt free balance sheet by FY2008 • Long-term growth should be solid due to expansion in international market • Five new test stores and 2 Banana Republics being opened in Tokyo

  11. Prospects (contd.) • Management attention to corporate governance and social responsibility reduces volatility • Gap has continually expanded their brand names and target demographics • Gap, Baby Gap, Old Navy, Banana Republic, Fourth and Townes

  12. Negatives • Higher Risk (beta 1.84) • Operating in Saturated Market • Needs meaningful growth to support shares long term • Rising interest rates have adversely affected specialty apparel retailers • Industry risks include: Fashion, markdowns and inventory risk

  13. Our Recommendation • Recommendation: Buy • New prospects with Forth and Towne and more expansion in the international market will help The Gap in their efforts to grow in a fiercely competitive environment • Gap’s balance sheet is saturated with cash • Share price is well valued relative to peers • Effective management will better position Gap for future success and shareholder return

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