Gap (NYSE: GPS) made a 10-year deal with Kanye West that seems like a win-win for both sides. Gap's stock initially jumped 42% on the deal's announcement but since then has given up about half of the gains. Gap's stock also includes Old Navy and Banana Republic which have been growing, but its namesake, Gap, is one of the retailers that's geared to appeal to a disappearing middle class and has failed to establish a strong online presence.
Kanye Deal
A new line of clothes "Yeezy Gap" will be introduced in stores and online in 2021. It'll certainly drive interest and foot traffic into the store for the struggling retailer. It'll also give the brand added appeal to a younger demographic who ordinarily wouldn't consider the Gap as a destination.
The deal includes an agreement for a new clothing line in addition to his "design vision" which gives him input on how the items are displayed in the store and online. Financial terms of the deal haven't been disclosed, but Gap is hoping that in the first five years, the deal can bring in an additional $1 billion in revenue. In recent years, Gap's revenues have been flat and the company has been closing stores.
Kanye's partnership with Adidas (OTC: ADDYY) has been a remarkable success. It's similar to the deal with Gap in that Yeezy will design the shoes and come up with the marketing strategy, while Adidas handles the production, marketing budget, and distribution. With Adidas, Yeezy gets a 5% royalty on sales from his line of shoes and apparel. He's likely gotten more favorable terms from Gap.
Currently, the Yeezy brand is valued close to $2 billion based on estimates. In 2019, sales for the Adidas-Yeezy tie-up were said to be $1.2 billion which would net him $65 million. This would make Yeezy the second-largest line of shoes behind the Jordan brand which generated $3.1 billion in sales in 2019.
Gap
The overall revenues for Gap have been flat over the past decade due to strength for Old Navy and Banana Republics. And this is another reflection of overall economic trends as Old Navy is focused on value, while Banana Republic is a more premium brand. In contrast, Gap which is focused on the middle has floundered.
The stock peaked at $45 in late-2014 and since then has been in a bear market. Pre-coronavirus, it was around $20 but then fell 80%. From its low, it's gained 200% but remains 40% off its prior levels. Its recent earnings report showed that its first-quarter sales fell from $3.71 billion in 2019's first quarter to $2.11 billion as a result. This is largely due to the company's reliance on sales from its physical store which was largely compromised due to the coronavirus. Online sales only grew 13% in the quarter which highlights its reliance on its physical stores.
Clearly, the company is struggling and its prospects look bleak especially if the coronavirus leads to a sustained drop in-store sales. The Kanye West partnership is a shot of adrenaline that could invigorate the brand.