What happened
Shares of Gap (GPS -3.83%) were flying higher on Friday morning after the company announced a partnership with Kanye West's fashion brand, Yeezy. As of 10:40 a.m. EDT, the stock was up 32% but had traded as much as 42% higher.
It's the best news Gap shareholders have had in a while. Even with this morning's eye-popping gains, the stock is still down around 30% from 52-week highs and down 22% since this time last year.
So what
Yeezy is a $2.9 billion brand founded by famed musician West in 2015. Until now, however, it was mostly known for its shoes manufactured in partnership with adidas. The shoes have gained a cult following due to their limited supply and robust secondary market. Some Yeezy shoes even resell for thousands of dollars.
In today's announcement, Yeezy will similarly partner with Gap, to create branded clothing for men, women, and children. West will maintain sole ownership of the brand and will exercise creative design for the forthcoming products. Gap said the clothing line will launch in 2021.
In clothing retail, one must maintain relevancy by keeping up with modern fashion trends. By inking a deal with one of the most fashionable brands around, Gap certainly is taking a step in that direction.
Gap stock is trading higher on its deal with Yeezy. Image source: Getty Images.
Now what
While today's news is cool, Gap shareholders should tap the brakes a little on all this enthusiasm and remember why the stock was down so much in the first place. The company has almost 4,000 physical stores under brands including The Gap, Banana Republic, and Old Navy. Those stores were closed due to the coronavirus, leading to a massive 43% year-over-year decline in first-quarter revenue.
That's a steep drop in revenue, and it's particularly burdensome for a clothing company like Gap. Granted, 25% of its sales came from e-commerce prior to COVID-19. That's better than many of its peers. And online sales grew 13% in Q1. However, when overall sales drop, companies resort to promotional pricing to move inventory.
The same was true for Gap in Q1. Its gross profit margin fell 23.6%, in part due to promotional pricing. This creates an inventory headwind for the company that doesn't immediately alleviate once stores reopen and normal economic activity resumes.
Therefore, Gap is still a stressed business. Investors should remain mindful of this. That said, by itself, Gap's partnership with Yeezy is encouraging. It could be a good revenue driver if it enjoys success similar to that of the adidas shoe line.
