Gap Soars Most on Record After Kanye Deal Brings Cool Factor

(Bloomberg) -- Kanye West is going to make Gap cool again. At least, that’s what investors hope.

The struggling apparel company’s shares soared the most in at least 40 years after it revealed a partnership agreement with the head-turning rapper and designer. West, whose sneaker line with Adidas AG routinely sells out, will work with Gap Inc. on a new line of apparel for men, women and kids called Yeezy Gap, the company said Friday.

The deal is a multiyear partnership, according to a Yeezy spokesperson. West has been traveling to Gap’s San Francisco headquarters from his ranch in Wyoming to work on the line, which is still in its design phase, the spokesperson said. The line, which won’t include footwear, is expected to debut in stores and online next year.

The move may give Gap some much-needed life as it struggles with changing consumer tastes and a turnaround effort that has been stymied by the coronavirus pandemic. Hitching itself to the sometimes-controversial artist could help Gap reinvigorate the brand, said BMO Capital Markets analyst Simeon Siegel.

“At the heart of it, the task of a brand is to figure out how to balance exclusivity and distribution,” he said. Gap has struggled with that, but if West can elevate the brand while taking advantage of the company’s broad reach, “that then allows Gap to sell a lot clothing.”

Gap shares surged as much as 42% in New York trading on Friday, the biggest intraday gain in Bloomberg data back to 1980, before paring gains to 19% at 3:30 p.m. The stock had fallen 43% this year through yesterday’s close.

Multiyear Partnership

The arrangement will expose West’s upscale brand to a broader market while letting Gap capitalize on Yeezy’s recent growth. Mark Breitbard, global head of the Gap brand, said in the statement that the new line would build on “the aesthetic and success” of the Yeezy brand.

West, who worked at a Gap store as a teenager in Chicago, will also have input on presentation in stores and the e-commerce website.

“What will be interesting is how the range is displayed and marketed, both online and in stores,” said Neil Saunders, an analyst with GlobalData Retail. “Gap doesn’t have much flair when it comes to merchandising and is very, very centrally controlled.”

West’s compensation will be tied to sales and his business will earn royalties and potential equity under the terms of the deal. And Gap is setting some lofty financial targets.

‘Big Things’

The company issued warrants for up to 8.5 million shares that would fully vest if the line achieves $700 million in net sales during the fiscal year, according to a regulatory filing. Gap had $16.4 billion in net revenue last year.

“They are expecting big things out of this deal,” Siegel said of the targets.

Gap could use a lift as it grapples with a difficult turnaround effort. In January, it called off a plan to separate its Old Navy brand from the rest of the business. Last quarter, net sales fell 50% as it struggled to cope with prolonged store closures due to the pandemic. Even before Covid-19, the company was struggling to attract shoppers, especially to its namesake brand.

Chief Executive Officer Sonia Syngal took over the company in March -- just as much of the U.S. went into lockdown due to the coronavirus. She arrived with a transformation plan in place, but the pandemic has upended the situation.

Syngal, who previously led the company’s Old Navy chain, said Gap is renegotiating its rent agreements and in the meantime is paying “what we consider fair rent.” A number of the company’s landlords are challenging this in court.

Rapid Growth

The new partnership comes amid rapid growth for West’s brand. Last year, Bank of America Corp. valued the sneaker side of the Yeezy’s business alone at as much as $3 billion, Bloomberg has reported. The shoes are made and distributed by Adidas, while West retains creative control and sole ownership of his brand.

Yeezy’s agreement with Adidas is in place through 2026. The brand was on track to generate $1.3 billion of shoe revenue in 2019, a 50% increase from a year earlier, according to Bank of America.

Gap is betting that the success he had with footwear can translate to mass-market apparel.

The deal is “the right move to draw a younger shopper, rebuild lost connections and get people to look at the brand again,” Bloomberg Intelligence analyst Poonam Goyal said. “They still will need to do more to drive a full recovery and be a retailer of the future but this is a promising first step.”

©2020 Bloomberg L.P.