GAP (NYSE: GPS) jumped as much as 42% on Friday after the announcement of 10-year partnership with Kayne West and his apparel brand “Yeezy”.
The “Yeezy” brand will design “Yeezy Gap” for adults and children and the merchandise is expected to hit the stores and online in 2021.
The specifics of the deal are still unknown. GAP has been struggling to attract customers and the revenue has remained lackluster. GAP has failed to gauge apparel trends and changing consumer preferences and their failure has translated into declining revenue.
Kayne West will receive royalties and possible equity, which is linked with the sales revenue of “Yeezy Gap”.
The global apparel retail industry is highly competitive. GAP as a brand has no specific long-term competitive advantage. The collaboration with Kayne West may gain new customers and entice the long-term customers to return to GAP stores.
Let’s examine the net sales revenue of GAP for the last (3) three years:
Source: 2019 Annual Report of Gap Inc
There are two major trends, which are worrying. The first trend being that the net the sales of GAP are declining, from $5.3 billion in 2017 to $4.6 billion in 2019. `
The second worrying trend is that majority of the revenue comes from Old Navy Global, and not from the GAP brand.
The GAP brand is clearly struggling and suffering from identity crises. GAP is clearly trying too hard to become "cool" and relevant again. GAP is hoping that the deal with Kayne West would be a game changer for the image of GAP.
THE CURRENT SITUATION:
The COVID-19 crises forced GAP to close all of its stores, and the e-commerce division of GAP is quite weak, the e-commerce sales were only up by 13% year-over-year in Q1 2020.
GAP has been struggling to pay rent; very limited amount of cash has been coming in due to the store closures. GAP is the largest non-anchor tenant in terms of the rent it pays Simon Property Group (NYSE: SPG), the biggest mall owner. Simon Property Group has filed a lawsuit, which is pending.
There is too much uncertainty at the moment due to the on-going COVID-19 crises; we don’t know when this pandemic will be over and impact thereof on the bottom line of GAP.
Due to the uncertainty, GAP is not providing 2020 financial outlook this time.
THE LIKELY IMPACT OF THE “YEEZY GAP"
The collection is expected to hit the stores and online in 2021. Not much can be said about the expected demand at this stage. GAP is expecting to add $1 billion revenue from sales of “Yeezy Gap”.
The $1 billion target is ambitious, and even if $1 billion revenue is added to the net sales of GAP, the additional $1 billion will still not be enough to reverse the depleted brand health and put the business back on track.
The exuberance shown by Wall Street of Friday was nothing but blind speculation, and speculation is no better than “the races or faro table”.
My recommendation would be to sell. I don’t see a bright future for GAP. There are too many uncertainties at this stage to invest in GAP.