Gap’s cultural cachet peaked two decades ago. Can its one-time Chicago sales floor employee Kanye West help the US retailer with a turnround?
From 2021, Gap will stock apparel from the ubiquitous hip hop star’s brand Yeezy. In exchange, Mr West will be entitled to royalties and Gap equity based on sales. The surprise tie-in led Gap to put on $700m of equity value on Friday, up by a fifth.
Both sides will benefit. Mr West gets access to the Gap marketing machine along with its stores and website. Gap boosts its credibility with a new generation. Better, it preserves cash flow by not buying the Yeezy brand, recently valued at $2.9bn. Mr West gets a cut of any revenue and then equity if the partnership succeeds.
Look no further than Mr West’s in-laws to see the perils of acquiring a celebrity brand. Heavily indebted cosmetics company Coty bought half of Kylie Jenner’s emerging beauty company for $600m earlier this year. Coty’s latest deal — a 20 per cent stake in Kim Kardashian West’s beauty line KKW — suggests that while Coty remains in thrall to the Kardashian family it has grown more cautious about its investments.
Gap’s royalty terms were not disclosed. However the company said Mr West would be eligible for 8.5m in warrants or roughly 2 per cent of the company’s stock. To get the full amount, Yeezy would have to exceed $700m in revenue in one year. (Gap’s revenue in the past 12 months was $15bn.)
With most of Gap’s stores shut in March, analysts have gone from forecasting 2020 ebitda of roughly $1.5bn to a deficit of $500m. The retailer raised $3bn of fresh capital in April. But shares that five years ago traded near $40 each are marked down to $12. Half of Mr West’s warrants have a strike price at $25 a share. A doubling of the shares would require something similar for Gap’s earnings. US apparel retailers hardly get star billing these days so that looks a stretch.
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