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SWOT Analysis

Published 31-Jul-2020

	POSITIVE	NEGATIVE
INTERNALorganizational attributes	Strengths Global Presence Liquidity Position Store Network	Weaknesses Financial Performance Dependence on Merchandise Vendors
EXTERNALenvironmental attributes	Opportunities Online Retail Market in US Acquisition of Janie and Jack Global Apparel Industry	Threats Intense Competition Manpower Costs in US COVID-19 Outbreak Foreign Exchange Risks

Overview

The Gap Inc (Gap) is a specialty retailer of apparel, footwear and accessories. Global presence, store network and liquidity position are the company's major strengths, even as dependency on merchandise vendors and financial performance remains a major area for concern. Online Retail Market in US, acquisition of Janie and Jack, and global apparel industry are likely to provide growth opportunities to the company. However, COVID-19 outbreak, foreign exchange risks, intense competition and manpower costs in US could affect its business operations.

Strengths

Global Presence

Wide geographic presence helps the company to mitigate the risks associated with dependence on a single region. Gap has business presence across North America, Europe and Asia. It operates owns stores in the US, the UK, Japan, Italy, China, France, Canada, Ireland, Hong Kong, Taiwan, and Mexico. The company operates franchised stores in Asia, Australia, Europe, Latin America, the Middle East, and Africa. It maintains corporate offices in San Francisco, Pleasanton, and Rocklin, California. The company also has franchise agreements with unaffiliated franchisees to operate Old Navy, Gap, and Banana Republic stores across Europe, Latin America, Asia, the Middle East, and Africa. In FY2020, the US accounted for 81.8% of the companys total revenue, followed by Canada (7%), Asia (6.6%), Europe (3.3%) and Other Regions (1.3%) respectively. Its global presence enables the company to build brand image and maintain a strong position in the market.

Liquidity Position

Gap reported high liquidity in FY2020. The companys current ratio was 1.4 in FY2020. The increase in current ratio could be due to 6.2% increase in total current assets, which grew from US$4,251 million in FY2019 to US$4,516 million in FY2020, due to increase in accounts payable and accrued expenses. Improved liquidity is an indication of the increasing ease in funding the companys day to day operations, which also improves its ability to capture growth opportunities in the market.

Store Network

A diversified store network helps the company to gain operational synergies and allows it to serve customers with efficiency. Gap retails and sells f apparel, accessories and personal care products for men, women and children through its retail stores, franchised stores and e-commerce portals. As of February 2020, the company operated 3,919 stores including 3,345 company-owned stores and 574 franchise stores with a total store size of 37 million sq. ft across North America, Europe and Asia regions. 1,207 stores in North America with a retail space of 19.5 million sq. ft.; 17 stores in Asia with a retail space of 0.2 million sq. ft.; 675 stores in North America with a retail space of 7.1 million sq. ft.; - 358 stores in Asia with a retail space of 3.2 million sq. ft.; 137 stores in Europe with a retail space of 1.1 million sq. ft.; 541 stores in North America with a retail space of 4.6 million sq. ft.; 48 stores in Asia with a retail space of 0.2 million sq. ft.; 190 Athleta stores with a retail space of 0.8 million sq. ft.; and 33 Intermix stores with a retail space of 0.1 million sq. ft.

Weaknesses

Financial Performance

The financial performance of the company declined in FY2020, which enables it to provide lower returns to its shareholders, and attract further investments. In FY2020, Gap reported revenue of US$16,383 million as compared to US$16,580 million in FY2019, which indicates annual decline of 1.2%. The decline in revenue was due to decrease of 10.2% in the sales of Gap Global. The other factors that contributed to decline include improvement in the performance of the core systems portfolio and complementary products. In FY2020, the companys operating margin was 3.5% as compared to 8.2% in FY2019. Weak operational performance indicates lack of focus by the company on cost management. Similarly, its net profit margin decreased from 6% in FY2019 to 2.1% in FY2020.

Dependence on Merchandise Vendors

The company is highly dependent on the vendors outside the US. It purchases private label and non-private label merchandise from approximately 700 vendors having facilities in approximately 40 countries. These outside vendors require complying with certain vendor conducts and environmental, labor, health, and safety standards in domestic and international markets. About 32% of the companys FY2020 purchases, by dollar value, were from factories in Vietnam, while 16% were from factories in China. Its two largest vendors accounted for 13% of the total sales in FY2020. Increase in product costs and taxes, import, financial and regulatory issues, or disruption of imports from Vietnam, China, or other foreign countries could affect the companys business operations.

Opportunities

Online Retail Market in US

Gap stands to benefit from the positive outlook of online retail market in the US. The company merchandises products through various online platforms, including gap.com, oldnavy.com, bananarepublic.com, intermixonline.com, weddingtonway.com and athleta.com. According to in-house research, online retail sector in the US is forecast to grow at a CAGR of 8.5% to reach US$447.4 billion by 2020. Multi-channel retail was the leading mode of sale in the US retail sector, accounting for a 58.2% share, while online pureplay accounted for the remaining 41.8%. The US accounts for about 32% of the global online retail sector value. The retailing of electrical and electronic goods was the largest segment in the sector in 2017, which accounted for 35.7% of the total value, followed by apparel retail (22.6%), home and garden products (12.1%), food and grocery retail (11.6%), furniture and floor coverings (4.2%), and footwear (3.5%). Other category accounted for 10.3% of the value.

Acquisition of Janie and Jack

Gap continues to view acquisitions as a major part of its growth strategy. These acquisitions are intended to augment growth, expand its business with new products, and enhance its geographical reach. In March 2019, the company acquired Janie and Jack, an apparel retailer with more than 100 retail stores in the US along with an e-commerce platform, from Gymboree Group Inc. The acquired entity will continue to operate as a standalone brand based in San Francisco. The deal allows Gap to expand its portfolio into the premium kids and baby business. The acquisition price was about US$35 million with an additional deal to purchase the Janie and Jack inventory at cost plus additional fees and expenses.

Global Apparel Industry

Gap stands to benefit from the positive outlook for global apparel industry. The changing consumers fashion style is the key drivers for the global growth of apparel market. Further, improving global macroeconomic condition, rising disposable income levels and increased popularity for online shopping are also fueling the market. According to in-house research, the global apparel retail industry is expected to have a value of US$1,834 billion, an increase of 29.7%. In terms of category, women's wear is the largest segment of the global apparel retail industry, accounting for 52.6% of the industry's total value, followed by menswear with 31.3% and childrens wear with 16.1% respectively. In terms of geography, Asia-Pacific accounts for 37.1% of the global apparel retail industry value, followed by Europe with 28.5%, the US with 23.6%, Middle East with 2.1% and Rest of the World with 8.7% respectively.

Threat

Intense Competition

The company operates in a highly competitive clothing retail market. The factors that determine the level of competition within the industry include service performance, price, and sales and distribution capabilities. Gap faces competition from Abercrombie & Fitch Co, American Eagle Outfitters Inc, Belk Inc, Forever 21 Inc, Guess Inc, H & M Hennes & Mauritz AB, J.Crew Group Inc, Le Chateau Inc, Nordstrom Inc, The TJX Companies Inc, Timberland LLC, and Urban Outfitters Inc. Apart from established players in developed countries, players from emerging countries are also competing hard to garner greater market share. Many of its competitors have a longer operating history, greater brand recognition, established customer and supplier relationships, and greater financial resources, which could lead to the creation of innovative products and business expansion through acquisitions.

Manpower Costs in US

Increasing manpower costs could have an adverse effect on the companys margins. As of February 2020, Gap employed 129,000 part-time and full-time employees. The tight labor markets, government mandated increases in minimum wages and a higher proportion of full-time employees could result in an increase in labor costs. The federal minimum Labor costs are rising significantly in the US. The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). As of January 2019, the minimum wage rate in the US was US$7.2 per hour. The minimum wage rate in 29 states and the District of Columbia is more than the federal rate. These wages range from US$ 13.2 in District of Columbia, US$12 in Massachusetts and Washington, US$11.1 in Colorado, US$11 in Arizona, US$10.8 in Vermont, US$9.9 in Arkansas, US$8.5 in Florida, US$8.2 per hour in Illinois. The minimum wage in the District of Columbia reached US$13.3 per hour.

COVID-19 Outbreak

The rapid spread of nCOVID-19 (novel corona virus) could significantly impact several industries, including the consumer product manufacturers and brick-and-mortor retailers, as consumers make a shift in spending patterns and buying behavior. Public health measures, such as social distancing and complete lockdown could further impact supply chain, marketing and sales of consumer products. According to the World Health Organization (WHO), the epidemic is spread to over 200 countries with over 8,50,000 confirmed cases and over 42,000 fatalities. The spread of virus is significant and alarming in China, Iran, Italy, Spain and other European counties. Several countries have either restricted or banned international travel and transport, and points of entry such as airports and ports. Though pharma giants, have commenced development of an alternative medicines and potential COVID-19 vaccine, which could take at least 12-18 months for human use as it needs to pass on several clinical trials.

Foreign Exchange Risks

Gap operates in many parts of the world and is exposed to fluctuations in foreign exchange rates. The company reports financials in the US dollar and therefore its revenue is exposed to volatility of the US dollar against other functional currencies, as it conducts business operations worldwide. Significant part of its revenue is also denominated in other currencies such as Canadian dollar, Japanese Yen, Indian rupees, Euro and British pound, among others. Major elements exposed to exchange rate risks include the company's investments in overseas subsidiaries and affiliates and monetary assets and liabilities arising from business transactions in foreign currencies. In FY2020, the company reported a loss of US$2 million from foreign currency translation adjustments. To minimize risks from currency fluctuations, the company involves in foreign exchange hedging activities by entering into foreign exchange forward contracts. However, there may be no assurance that such hedging activities or measures may limit the impact of movements in exchange rates on the company's results of operations.