Much Has Gone Wrong for No-Moat Gap, but Athleta and Old Navy Still Have Growth Prospects

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, it was the second-largest individual apparel brand by retail sales in the United States in 2022, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for the Old Navy (up from $8.2 billion in 2022) as achievable by the end of this decade. The label, though, faces considerable competition in the discount apparel space and already has more than 1,200 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have just over 1,400 locations in 10 years.