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Gap Limited On Upside Gap (GPS) is priced low, but that is not enough to justify a position in the company. The company has a variety of strengths but there are several factors working against it and it's only going to get worse. The company is losing stores each year in its core labels.
UNDERSTANDING RETAILClothing is a commodity. No matter how well or how popular a company becomes, it still can't charge over a certain amount for its products. There is more flexibility in upscale clothing. Couture clothing is hand stitched so spending hundreds if not thousands makes valentino shoes online sense. It is clear that the hands that stitch the garment need paid. Fabrics and cuts help too. Just think of the last time you bought a suit. Wool suits cost more than polyester, tailored cuts more than boxy numbers.
The market is much more difficult in casual clothes. You wouldn't expect to find a $100 pair of jeans at Gap, just like you wouldn't expect to find a wool suit for less than a few hundred dollars. These things have a "commoditylike value". Sure there are outliers a $200 pair of designers jeans or a cheap starter suit for under $100 but the concept holds true for middle market retailers, and it is an important aspect of the business to understand if you are going to invest in the industry.
Amongst retail stocks, Gap personifies this struggle more than most. Brands like Michael Kors (NYSE:KORS) have retail stores, wholesale sales, and licensing deals. If its retail stores aren't bringing in much, the company can fall back on its wholesale outlets and licensing. In addition, because its goods are sold at so many different retailers, budget conscious Michael Kors can always find what they want at a discount.
Companies like TJX Companies (NYSE:TJX) carry a range of brands at a variety of stores geared towards different price points. These aspects give such a company a chance to hedge their offerings. Their price points can shift and play against one another. If a pair of jeans moves from a cost of $30 to $40, consumers are more likely to accept the change because they can see that a range of brands are all charging approximately the same. In addition, TJX Companies doesn't make its own clothing. It can leverage economies of scale to buy goods at a discount buying goods from clothing brands that are out of season or last valentino shoes season. Consumers are willing to buy such pieces because they are at a discount.
GAP AS A COMPANYGap does not have this luxury. While the company does offer items at stores geared towards specific price points and lifestyles Old Navy for low cost casual items, namesake Gap for better quality basics, Athleta for exercise and active clothing, and Banana Republic for more upscale, stylish, and professional consumers it only has two multibrand offerings. Gap owns Piperlime, a multibrand shoe store, and Intermix, a multibrand designer store. As such, its opportunity to hedge its offerings is limited.
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