The Gap Name

by Tom Gardner

Alexandria, VA (June 30, 1998) -- We purchased our 37 shares of Gap Inc. on May 1st of this year, and since that time, the stock has already risen 22%. Over the past three years, Gap has been on a rampage. The value of the company is up from a low of $11 to $62 per share today. That's a 460% rise in just thirty-six months. We've only enjoyed 22% of that ascent, but it's a return that has stomped the S&P 500 over the short period.

Looking back even further, as Rick Munarriz cited in his Daily Double of yesterday, Gap Inc. has averaged more than 26% annual growth during its twenty-two years in the public markets. Almost unthinkable. During that time, a $20,000 investment in Gap has grown to more than $3.2 million.

In a passbook savings account for twenty-two years, that same $20,000 would've grown to about $47,000. There's been a fair amount of volatility in the pricing of Gap shares over those twenty-two years, but what a lesson about our public markets. Jeans, t-shirts, and spring dresses. Financials that showed a strengthening position over the long term. Buying and holding.

Now, the consensus of late is that Gap has thrived in the past few years by recognizing that as much as it is a retailer of casual clothing, it's also a name brand business. The names themselves may be worth more than anything. It's hard to believe, but possible. The company has pressed forward with three increasingly unique brands.

Running from lower end to higher end, they are Old Navy, Gap, and Banana Republic. Firsthand experience -- the author of this column went into Old Navy three weeks ago to buy two shirts and came out with $190 of merchandise... nearly a full summer wardrobe if you have a washing machine handy. But could it be that the burnishing of that name on the consumer is worth X-times more than that first purchase?

That's the sense today -- that those three name brands themselves (along with babyGap and GapKids) may be the greatest values to the company. The names and what they represent to the world may hold greater value in the long-term than the sales of khakis and t-shirts and denim in the short-term. It's almost impossible to distinguish one from the other. After all, without those sales, it gets difficult to support future marketing campaigns. But if that estimation of the value of a brand is even close to the truth, then a name can be worth billions of dollars.

Down in Atlanta, Coca-Cola is valued at $210 billion after seventy-nine years in the public markets. And, over that time, Coca-Cola is estimated to have spent on the order of $80 billion in the marketing and promotion of its names and products. How much has it spent on product development? Gap Inc. is a company valued at $24 billion after twenty-two years in the public markets. How much will it spend on marketing over the next fifty years? How much on new product development?

Branding is an enormous business.

To remind myself of that, I flipped on the television set this morning, scanning channels for advertisements. Everything from drugmakers to discount brokers, from travel services to dog food mixers, from pain relievers to automobile makers are pushing their name out to the public every hour (and funding the development and expansion of the most popular broadcasting medium in our people's history).

Given the major-league spending on name-making and the potentially enormous rewards of a global brand name, it seems to me that a Cash-King investor would be an idiot not to make some assessment of why and how these product and service names got made and get defended.

And as we consider, over the next few days of C-K columns, both the making and defending of the name, we should also wonder why one-time wonders like Gloria Vanderbilt jeans, Atari game systems, and People's Express airlines flourished only to dissolve into a spray of dust blown off the major exchanges. What sustains a name? We need to make some educated guesses about that.

Let's close this column with a mention of Step 6 of our 11 Steps to Cash-King Investing. One of the primary characteristics of the companies we invest in is that they focus on broadening their brand name around the world. Brand name franchises are not only simpler for investors to follow, but we think they're also going to end up as the creators of considerably more wealth for shareowners because of that familiarity. In our sixth step, we wrote:

True Cash-King companies are ultimately looking to establish a direct connection with billions of consumer minds, day in and day out. And they'd like to consistently draw a clear distinction between their product and the competing and generic brands.

That's pretty straightforward -- but it's amazing how many companies dive headlong into their industry without that focus. It's also striking how few companies have a game plan for following up on early success. Making the name is just stage one.

The enduring challenge for the Cash-King consumer franchise is to create a spirit to the brand that every day can appeal gradually to a broader audience without "selling out" the expectations of veteran customers. That is one of the problems that, I think, Nike has been having. Today it is trying to navigate the sale of equipment for superior athletic performance to a growing number of non-athletes. How does it get my mother to wear Nikes in the garden without irritating the fifteen-year-old shooting three-pointers in the gym?

Expanding a brand through different generations, across income levels, and into foreign lands is like a marathon steeplechase. Over the hedge, across the brook, around the turn, lift to get across the water jump, down for the sprint to the next hedge oncoming. It's a puzzle, and a maze, and a marathon that demands a lot of reflection and continuous measurement of the progress (or regress).

And the expense of it all can be enormous. Gap Inc. will spend billions of dollars over the next twenty years defending and extending its consumer brand in numerous markets. Those billions spent to drive names and ideas into the collective unconscious is a capital and labor cost away from developing new products. When it fails, the morale at a company can deteriorate. Sales volumes can slacken. Key employees can take to the hills. A public business can take on the appearance of an old rubber ball, deflated in the dusty corner of a closet.

But, enough about failure. What if a branding campaign succeeds?

We'll speak of that, as Shakespeare would say, on the morrow.

Tom Gardner, Fool

06/30/98 Close

Stock  Change    Bid 
 AXP   +2 5/16  114.00 
 CHV   +1 1/4   83.75 
 CSCO  +  1/4   92.06 
 KO    -  1/2   85.50 
 GPS   -  13/16 61.63 
 EK    +2 7/16  73.06 
 XON   -  3/16  71.31 
 GM    -1 7/16  66.81 
 INTC  -1 11/16 74.06 
 MSFT  +1       108.38 
 PFE   -1 1/8   108.63 
 TROW  -  3/4   37.50 
                  Day   Month    Year  History 
         C-K      -0.16%   7.84%  14.05%  14.05% 
         S&P:     -0.41%   3.94%  13.24%  13.24% 
         NASDAQ:  +0.19%   6.51%  14.63%  14.63% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    108.38    38.47% 
     2/3/98   22 Pfizer        82.30    108.63    31.99% 
    2/27/98   27 Coca-Cola     69.11     85.50    23.72% 
     5/1/98   37 Gap Inc.      51.09     61.63    20.62% 
     2/6/98   56 T. Rowe Pr    33.67     37.50    11.36% 
    5/26/98   18 American E   104.07    114.00     9.55% 
    6/23/98   23 Cisco Syst    86.35     92.06     6.62% 
    2/13/98   22 Intel         84.67     74.06   -12.53% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     73.06    15.70% 
    3/12/98   20 Exxon         64.34     71.31    10.85% 
    3/12/98   15 Chevron       83.34     83.75     0.49% 
    3/12/98   17 General Mo    72.41     66.81    -7.72% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
    5/26/98   18 American E  1873.20   2052.00   $178.80 
     2/3/98   24 Microsoft   1878.45   2601.00   $722.55 
     2/3/98   22 Pfizer      1810.58   2389.75   $579.17 
    2/27/98   27 Coca-Cola   1865.89   2308.50   $442.61 
     5/1/98   37 Gap Inc.    1890.33   2280.13   $389.80 
     2/6/98   56 T. Rowe Pr  1885.70   2100.00   $214.30 
    6/23/98   23 Cisco Syst  1985.95   2117.44   $131.49 
    2/13/98   22 Intel       1862.83   1629.38  -$233.46 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   15 Chevron     1250.14   1256.25     $6.11 
    3/12/98   20 Eastman Ko  1262.95   1461.25   $198.30 
    3/12/98   20 Exxon       1286.70   1426.25   $139.55 
    3/12/98   17 General Mo  1230.89   1135.81   -$95.08 
                               CASH     $51.68 
                              TOTAL  $22809.43 
 *The year for the S&P and Nasdaq will be as of 02/03/98