Gap Inc. Proves Money Does Not Grow on Trees

April 17, 2012

by Talia Lambarki

Money does not grow on trees, so where is the source of it for Gap Inc.? “The Gap, Inc. is a global specialty retailer offering apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. Most of the products sold under its brand names are designed by the Company and manufactured by independent sources. The Company also sells products that are designed and manufactured by branded third parties. The Company operates in two segments: Stores, which includes the results of the retail stores for Gap, Old Navy, and Banana Republic, and Direct, which includes the results for its online brands, both domestic and international. The Company has franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in many other countries around the world. Under these agreements, third parties operate or will operate stores that sell apparel and related products under its brand names” (Gap Inc. 2011 Disclosure). The stores segment contributes 91% of net sales for the company, while the direct segment contributes 9%.

The reporting segments can be further divided to analyze various aspects of the company. The stores reporting segment can be divided into regions of operation. The geographic regions are classified as the United States, Canada, Europe, Asia, and other. Geographical segmentation is based on the way business activities for retail stores are managed and evaluated. The direct reporting segment (online sales) has a different distribution method than the direct reporting segment and can be divided as international and domestic.

Records of store segment sales by region reveal that the highest percentage of net sales for the company comes from retail stores in the United States of 78.44%. Much smaller percentages of net sales are from Asia (7.85%), Canada (7.17%), Europe (5.88%), and other regions (0.67%).

Net sales for the Gap totaled approximately $14.7 million in FY2010 for both the stores and direct segments. The Gap experienced a 2% decline in sales from FY2008 to FY2009. However, there was revenue growth of 3% from FY2009 to FY2010. The gross profit margin slightly increased over the three years, indicating higher sales and/or decreases in the costs of goods sold. The operating profit margin trended upward with 10.9% in 2008, 12.8% in 2009, and 13.4% in 2010, revealing increased operating efficiencies. Also during the years 2008 through 2010, the Gap sustained higher net profit margins than Abercrombie & Fitch and American Eagle Outfitters and grew from 7% in FY2008 to 8% the following year and remained constant the year after.

It is in the best interest of Gap management to continue upward trends, especially since the company operates in such a competitive industry. Its profitability can be used to fuel global expansion, product development and innovation, and advertising efforts for continued revenue growth.


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