Kanye West has sent shares of Gap Inc. soaring — and is positioned to cash in big time if that keeps up.
Shares of the company shot up 18.8 percent to $12.07 Friday on word that West’s Yeezy brand was coming to its namesake chain’s stores and web site next year.
Under West’s creative direction, the Yeezy design studio will develop a line of basics for men, women and kids at “accessible price points.” Mowalola Ogunlesi was named design director for the line.
West maintains sole ownership of the Yeezy brand, which was valued at $2.9 billion in April. With Friday’s stock surge, Gap has a market capitalization of $4.5 billion and the fashion disruptor now has 8.5 million reasons to keep it moving higher.
Gap issued Yeezy Supply warrants for up to 8.5 million shares of the company’s common stock — equivalent to about 2.3 percent of the retailer’s outstanding shares.
The warrants vest as the Yeezy line hits certain sales targets. According to a filing with the Securities and Exchange Commission, one-third of the warrants can be converted to stock if the line hits annual sales of $250 million, while another third is unlocked at both $450 million and $700 million.
If the line were to sell, for example, $500 million in its first year, Yeezy Supply could convert the warrants into 5.7 million Gap shares.
Yeezy would have to buy half of those shares at roughly Thursday’s closing price of $10.16 and the other half at $25 each.
That means the deal has the potential to pay off big for both sides.
Gap stock hasn’t traded at $25 at since May 2019 — a few months after the company said it would spin off Old Navy, a plan that was abandoned after chief executive officer Art Peck was ousted and the value chain started seeing slower growth.
The warrants vest in full if there’s a change of control at the company, otherwise they expire in 2025 and Gap can choose to pay in cash or shares or some combination.
Ike Boruchow, a Wells Fargo analyst, who upgraded Gap from “underweight” to “overweight” this week in a well-timed call, said: “While this announcement was unexpected, it is highly aligned with our view that Gap ownership and new management have taken on a new ‘all options on the table’ mentality, and are highly committed to finding new and creative ways to unlock value from their portfolio.
“Bears will likely point out that an additional $700 million in sales (in the best case scenario) is not material to Gap’s $15 billion sales base — but we would argue that, much more importantly, this partnership could provide a positive halo effect to the ailing Gap brand (and share price) that has struggled to rediscover its ‘cool’ over the past decade, while driving incremental traffic and purchases from new and lapsed customers,” the analyst said.
Certainly, Gap is now in the cultural spotlight again.
Mark Breitbard, global head of Gap brand, said, “We are excited to welcome Kanye back to the Gap family as a creative visionary, building on the aesthetic and success of his Yeezy brand and together defining a next-level retail partnership.”
The partnership marks something of a return for West, who worked in a Gap store as a teen growing up in Chicago.