Gap Vs Lululemon Stock: Which Is Best?

Gap Inc. [NYSE: GPS] is a global apparel retail company. The company offers casual apparel, accessories and personal care products for men, women and children under various brands, including:

• Old Navy,
• Gap,
• Banana Republic,
• Athleta, Intermix,
• Janie and Jack, and
• Hill City brands.

It has company-operated stores throughout Asia, Australia, Europe, Latin America, the Middle East and Africa.

Lululemon initially started with fitness apparel for women who aimed to strike a balance between a healthy life and a busy lifestyle. It later expanded its reach by bringing men and youth into its fold. Lululemon has also been expanding into casual clothes for travel and work.

Both companies are massive and execute well. The question is which is best: Gap Vs Lululemon stock?

The Gap 101

Gap offers its products online through company-owned websites. Gap Inc. is the largest specialty retailer in the United States, and the third largest in the world, behind Spain-based Inditex (parent company of Zara) and Swedish multinational clothing-retail company H&M. 

The company operates six primary divisions:

• Gap Global,
• Banana Republic,
• Old Navy,
• Intermix,
• Hill City, and
• Athleta.

The Gap Global segment includes apparel and accessories for men and women under its namesake banner.

The Old Navy Global segment offers high quality fashion essentials for the entire family. The Banana Republic segment offers modern and refined clothing along with related accessories such as eyewear, jewelry, shoes, handbags and fragrances for men and women.

The Athleta segment offers fitness apparel for women to help them comfortably participate in an active lifestyle. The Intermix segment features styles for women from a compelling mix of both established and emerging designers.

Lululemon Athletica 101

Lululemon Athletica [NASDAQ: LULU] engages in the designing, distributing and retail of athletic clothing products and accessories.

It offers a wide variety of clothing, including pants, performance shirts, tops, shorts, and jackets that people can wear as they engage in healthy lifestyle and athletic activities such as running, training, dance and yoga along with other pursuits for general fitness.

In addition to athletic clothing, the company also sells accessories such as bags, socks, and yoga mats among others.

 

Founded by Dennis J. Wilson in 1998 as a retailer of yoga pants and other yoga wear, the Vancouver, Canada-based company has since expanded to sell its products internationally in more than 500 company-operated stores in North America, United States, Asia, Australia, New Zealand and Europe. 

Is Gap Stock A Buy?

Gap has been struggling of late and the pandemic has made the situation worse for clothing retailers, majority of whom have got pummeled in 2020.

The company’s shares, however, of late, have been going northwards after the management vowed to return to profitable growth next year, taking a slew of measures as it tries to revamp its business.

Gap To Close 350 Stores By 2024

Gap is shuttering hundreds of stores as it attempts to flee failing malls and plummeting sales amidst retail apocalypse introduced by the coronavirus pandemic.

Mark Breitbard, the CEO of the Gap brand, said that the decision to exit from malls represented “huge changes” for the company, which, for decades, occupied a prominent place in shopping malls around the country.

Gap recently announced that it will be closing 220 Gap stores, or roughly one-third of its store base, by early 2024. Post the closure, 80% of its remaining Gap stores will be in off-mall locations.

The San Francisco-based retailer also said that nearly 80% of its revenues will come from online sales and locations outside of malls by 2023. Continuing further, Gap Inc. also divulged its plans to close 130 of its Banana Republic stores in North America in the next three years.

All in all, the apparel retailer intends to close 30% of the company’s Gap and Banana Republic stores in North America to focus more aggressively on outlets and e-commerce business.

The decision to close stores and pull back from malls come as Gap Stores in malls, grappling with falling sales in recent years, have struggled to define their place and position within the apparel industry.

Gap, like other retailers, has also been badly hit by the coronavirus pandemic, with the company being forced to temporarily close all its North American stores in the spring, a highly unfortunate event for the already struggling retailer as it lost 70% of its revenue overnight.

The pandemic-enforced lockdown of the economy also led many people to shift online, a trend which experts believe will continue even after all stay- at- home restrictions are lifted.

“We’ve been overly reliant on low-productivity, high-rent stores,” said Mark Breitbard, CEO of the Gap brand, which was founded in 1969. “We’ve used the past six months to address the real estate issues and accelerate our shift to a true omni-model.”

Store Closures Across Europe

In addition, the company, in order to shake up its business, is also mulling brick-and-mortar stores closures across Europe. Gap recently announced that it is exploring various strategic options that could help it amplify its reach across the continent.

One of the options at the forefront is the possible shuttering of company-operated Gap stores in France, Italy, the UK and Ireland by the end of second quarter of 2021.

The apparel retailer also announced that it is reviewing the company’s warehouses and distribution model and its Gap and Banana Republic company-owned e-operations in Europe.

The specialty retailer had previously announced in June that the crisis created by the pandemic coaxed it to right-size the business, while acknowledging the fact that there was a lot of work to be done to bring the business back on track.

The company said its area of focus would be headcount reduction by one-fourth, leveraging online growth, curtail product assortment, and create new products and franchise opportunities.

Clothing Collaboration With Kanye West

Gap recently announced a clothing collaboration with Kanye West. The team-up with Mr. West (a celebrity, creative entrepreneur, rapper and designer) and Yeezy, his fashion company, for a new clothing line called Yeezy Gap, will be introduced in stores in the first half of 2021 and will feature an affordable range of menswear, womenswear and kids’ clothes.

However, the collaboration did not extend to any footwear, and not without reason, as it would have impinged on his hugely successful collaboration with Adidas.

The American retailer, battling with an identity crisis in recent years, will be fervently hoping that West’s star power will help revive its sagging fortunes.

The deal is for 10 years with an option to renew after five, with the struggling American retailer hoping that the collaboration would bring in $1bn in annual sales by the five-year point.

Focus on Athleta and Old Navy, Cuts At Gap & Banana Republic

Most importantly, the company intends to lay a heavier focus on its thriving low-priced Old Navy brand and activewear chain Athleta. The apparel maker plans to add 100 new Old Navy and Athleta stores, wanting these two brands to account for 70% of the revenue by FY23, from the current level of around 55%.

Management said that it wants to see Old Navy revenues reach $10 billion, and Athleta sales double to $2 billion by 2023.

The shift, an effort to keep the momentum going seen during the pandemic and an effort to close the gap with athleisure leader Lululemon, was disclosed at its Power Plan 2023 strategy at a virtual investor day presentation in October.  

“We felt confident that our plan is very achievable and it was time to share it,” Old Navy Chief Executive Officer Nancy Green said in an interview. Old Navy is Gap Inc.’s biggest business with annual sales of $8 billion in its most recent year. 

It is forecast to grow to $10 billion by early 2024. It is also believed that Old Navy’s headcount could potentially increase in high-focus categories such as its e-commerce business.

Athleta, which sells activewear, has been a silver lining for the company as consumers preferred more comfortable attire during the pandemic.

Gap plans to open 30 to 40 Old Navy new stores and 20-30 new Athleta stores in smaller markets with population of 200,000 or less in the next three years. Old Navy currently has about 1,200 stores, whereas Athleta has about 200 stores in the U.S.

The retailer hopes that closing stores, renegotiating rent and moving online would help it annually save approximately $100 million as it expects to return to profitable growth next year, allaying investor concerns as the company took a severe financial hit because of the coronavirus pandemic.

Return To Profitable Growth By 2023

Gap stock has been a laggard in recent years, and the pandemic further added to its woes, forcing the company to close its stores.

Online net sales surged 95%, but even such a jump could not fully compensate for Covid-19-related store closures, which pushed net sales down to $3.3 billion from $4 billion, a plunge of 18% on a year-over-year basis. 

Gap brand net sales were down 28%. The apparel retailer in the second quarter reported ($0.17) EPS for the quarter, better than consensus estimate of ($0.41).

Its Old Navy brand, a constant performer, lived up to its reputation with 24% comps increase. Its smaller women’s athleisure wear business, Athleta, turned in a stellar performance with another strong rise. This lifestyle and fitness brand, which Gap acquired in 2008, was the only brand that reported an increase in net sales during the quarter ending August 1.

Athleta has been a real driver of growth for Gap as consumer preference shifts to comfortable clothing, and the company thinks it will double sales to $2 billion by 2023.

Gap also said it sees operating cash flow reaching 10% of sales and its EBITDA margin at 10% or more in three years. 

Also on its radar are sales growing by low-to-mid-single digits annually as it tries to reach a profit margin of at least 10% in the next three years, aided by focusing on its higher margin brands, store rationalization and a shift towards e-commerce.

Should You Invest In Lululemon?

Lululemon is an excellent example of a company whose mantra for success has been to market a lifestyle rather than a product. The company has focused its growth stratagem on its branded yoga and exercise apparel, stepping stones to a dynamic, healthy and enjoyable lifestyle.

Lululemon’s shares have risen steadily in recent years as the company’s business strategy has clicked, allowing it to create a niche for itself in the athletic apparel industry and price its products at a premium.

It has reinforced its brand image and established itself as one of the world’s most successful retailers, as consumers increasingly adopt the company’s products as fashion apparel and not just for exercise purposes.

To be fair, Lululemon’s successful journey has not been without its own share of controversies, including when it had to pull out its popular black Luon yoga pants from store shelves in early 2013 after it discovered that the sheer material used was too see-through.

The long-term margin outlook for Lululemon looks solid given the fact that experts expect more people to continue shopping online even post-Covid.

Lulu reported its quarterly earnings data on Tuesday, September 8th. Bolstered by a surge in its e-commerce business as stay-at-home consumers preferred comfy apparel like yoga pants, the athletic apparel retailer earned 74 cents a share, topping the consensus estimate of $0.56 by $0.18.

The apparel retailer earned $902.90 million during the quarter, up 2.2% on a year-over-year basis, and comfortably above estimates for $833.81 million.

The company informed that 492 of its 506 company-run stores were open as of August 2, 2020. However, the pandemic and stay-at-home orders caused net sales to plummet by more than 50% during the quarter.

However, e-commerce has been the bright spot for Lululemon throughout the pandemic. In a similar fashion to big retailers such as Gap Inc. and Nike Inc., Lululemon enjoyed stupendous growth in its online sales, which made up 61% of total net sales.

Quarantined consumers shopped from its e-commerce sites which caused online sales to jump 155%. In the first quarter of 2019, e-commerce revenue just made up 26.8% of total revenue.

There are still more reasons to be optimistic about the continuing growth of online sales as the apparel retailer boosts its online offerings with free online workouts and one-on-one video chats with sales associates.

The previous quarter results did come below analysts’ expectations for sales and profit as the contagion spread its wings and unleashed economic chaos.  However, the company came back strongly in the latest quarter as it enjoyed an online sales boom with stay-at-home consumers eagerly embracing the comfy clothes offered by the company.

Lululemon stock soared 90% in 2019 and analysts expect it to continue its big rally in the coming years with the company still in its nascent stage of international expansion. Lululemon is looking to grow its square footage in China at a 40% compound annual growth rate through 2024, while, at the same time, also expanding its products portfolio to reach a bigger market.

Lululemon’s main women’s business continues to flourish, and to further boost its sales and profitability, the company has also expanded successfully into the men’s category in newer markets like Europe and Asia. 

Lululemon’s shares have risen steadily in recent years and analysts remain upbeat about its long-term outlook.

Gap vs Lululemon: The Bottom Line

The Case For Gap

The last few years have brought in a lot of grief for the revered American retailer. Falling sales, decreasing footfall in malls, high rents and dwindling profits has led to its stock price declining more than 30% in the last three years.

And to further compound its woes, the company was dealt a near-death blow by the pandemic as it was deemed a non-essential retailer this year and all of its stores were shut down.

However, the management has taken a series of important strategic decisions to rectify the situation, which includes closing of almost one-third of Gap and Banana Republic stores in North America, closure of its brick-and-mortar stores across Europe, a switch to e-commerce and a greater focus on its best performing Old Navy and Athleta brands.

The company, which also owns Banana Republic and its namesake brand, seems to be in a rebound mode as, despite the fear of a second wave of the pandemic, it has been one of the top performing apparel retailers in the market.

Its second-quarter earnings report came in better than expected and analysts’ sentiments towards it has been changing with many stating that the apparel retailer can benefit from focusing more on its Old Navy and Athleta brands, as well as its collaboration with Kanye West.

Consumer companies have been pretty enthusiastic about partnering with West and his in-laws, though doubts persist about the rapper and fashion designer’s collections to resonate with the mass market, because of their wildly inflated price tags.

Yet, the collaboration does bring a much-needed freshness to the brand, and could help the struggling retailer enhance its reach and revenue.

The ailing retailer added 3.5 million new online customers to its base, a very positive sign as it shows residual demand exists for its fashions.

At the top of the list, however, is Gap’s smallest business, Athleta. In its second quarter, the women’s athleisure brand witnessed a 6% increase in overall sales, whereas online sales surged a highly impressive 74%.

Athleta’s reputation as an up-and-coming brand grows from strength to strength with consumers’ shifting preference towards athleisure and athletic clothing. Athleta is quickly approaching Banana Republic’s size in global sales, and all signs point towards it becoming Gap’s third-biggest brand in the very near future.

Another major benefit for Gap is that its decision to exit malls could lead to a big drop in its real-estate obligations.

Gap, as mentioned earlier, has been struggling for few years now, but, having said that, it is advisable for investors to look past the near-term pressure from the pandemic.

Stock price is up 12% this year, and poised to go higher as Gap benefits from better locations, growing strength at its Old Navy and Athleta brand, decision to move away from malls, skyrocketing digital sales, relevant merchandise selections, and the closure of 350 stores by the end of 2023.

All these factors offer enough hope about its ability to survive the pandemic-induced wreckage, and even flourish going forward.

Lululemon: The company is benefitting from enduring demand for comfortable clothes

The pandemic and the ‘work from home’ culture that it has spawned has been somewhat of a disaster for many apparel companies. Stay at home employees attending videoconferencing calls have made “business up top but party below” an official fashion trend. You may be wearing a chic blazer above and a pajama below.

This is officially corroborated by the U.S. Census Bureau, which reveals that clothing and apparel retail sales have plummeted 35% and department store sales are down 19% in 2020 in comparison to last year.

The pandemic may have wiped out demand for apparel and driven many apparel companies to insolvency, but the upscale purveyor of yoga pants seemed to have skillfully bucked this trend.

It, however, in a way implies that Lululemon was spared the lashing meted out to its peers by the pandemic. The company’s sales suffered a decline of 7% to $1.55 billion through the first half of the company’s 2020 fiscal year.

It is in sharp contrast to over 20% pace of growth the company boasted of in 2019. This may not look too rosy at the moment for the athletic clothing company, but it should be noted that it is still in a much better position than its peers – implying that it continues to quickly gobble up market share.

Lululemon’s strategy of expanding beyond making athletic wear for women and bringing men and youth into its fold with a full-fledged line of athletic-inspired clothing and accessories seems to be paying off handsomely. 

More than that, what allowed the company to carve a niche for itself in a crowded market was its foresightedness as the company started focusing heavily on e-commerce years ago, skillfully figuring out that direct-to-consumer sales have a much higher margin than retail operations. 

Selling online has helped it reap rich dividends during the Covid crisis.  As a result, the company reported a surge in its e-commerce business with its digital sales jumping 155% in its second quarter, and going a long way towards compensating for the temporary closure of its stores when the pandemic was at its peak.

And the most interesting thing to note is that, despite the dire straits that brick-and-mortar retailers find themselves in, Lululemon Athletica Inc. is going ahead with its proposal to open new brick-and-mortar stores across the U.S. and especially in China.

Chief Executive Officer Calvin McDonald justifies the expansion plans amidst the turbulence by stating that Lululemon’s stores are small and profitable, and well-liked by the brand’s loyal customers.

Also, the apparel maker pays attention to the goodwill it generates. For example, despite the hampered sales, the company has still been paying its full rent to the landlords unlike other major brands like Gap Inc. that suspended some payments.

Consumers of all kinds are flocking to the brand with the company focusing on building a strong brand loyalty through activities like free classes, sporting events and providing support to athletes and yoga practitioners known as yogis.

While yoga pants selling for $100 and tank tops for $58 may seem like a stretch for many people, given the battering the economy has taken, the company remains highly profitable even in a shaky year as consumers prefer its comfortable, durable and aesthetically pleasing clothes.

The company has an aggressive five-year growth plan with new apparel products in the pipeline. Lululemon has devoted more square footage to men’s outfits as part of a goal to more than double revenue in this category by 2023, while expanding its women’s and accessories business.

The retailer also remains optimistic about doubling its digital revenue and increasing its international sales by 400%. To sum it up, the apparel retailer with a healthy balance sheet, good cash reserves, zero debt, high-end athletic line, and solid growth strategy looks like an excellent investment idea.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.