Updated Research Report on Gap - Analyst Blog

On Jun 18, 2014, we issued an updated research report on Gap Inc. GPS after the company posted first-quarter fiscal 2014 results followed by positive comparable store sales (comps).

Gap's initiatives of enhancing its omni-channel capabilities, energizing global growth and managing its inventory effectively were well reflected through its top-line growth in first-quarter fiscal 2014. The company displayed sales growth of 1.2% despite severe winter weather conditions in the initial part of the quarter, slow start of the spring selling season and unfavorable foreign exchange rates.

However, bottom line failed to deliver desired results and fell 18.3% year over year. The decline was due to higher cost of goods sold and occupancy expenses along with unfavorable foreign currency translations.

With continued focus on developing its omni-channel network, Gap's quarterly online sales came in at $575 million, up 13% from the prior-year quarter. Looking ahead, management reiterated its earnings guidance of $2.90–$2.95 per share for fiscal 2014.

Following the mixed results last month, the company recently posted 1% increase in comps for the 4 weeks ended May 31, 2014 compared with 7% growth registered for the 4 weeks ended Jun 1, 2013, driven by strong results at its Banana Republic and Old Navy stores. Moreover, net sales in May totaled $1.27 billion, up 4% compared with the prior-year period sales of $1.22 billion.  

Gap is a leading player in the highly fragmented specialty retail sector, offering a diverse range of clothing, accessories and personal care products for men, women, children and infants. Its flagship brands include Gap, Banana Republic, Old Navy, Piperlime and Athleta. The company's globally recognized brands complement one another, enabling it to leverage its position in the sector.

The company current marketing strategy is focused on driving comps and is expected to continue showing positive results going forward. The company has been adopting a more proactive approach to increase traffic.

In an effort to penetrate deeper into the $1.4 trillion global apparel retail market, the premier international specialty retailer is focusing more on increasing its worldwide presence. Over the past few years, the company has aggressively expanded its global footprint across emerging markets including China, Russia, South Africa and certain Latin American countries. Meanwhile, it has adopted a policy of strategically reducing its exposure in the North American market, which is witnessing sluggish growth and high competition. We believe the fading brick-and-mortar retailing concept in the United States is a major reason behind Gap's expansion of its footprint overseas.

However, we remain slightly cautious about the stock's future operating performance due to rise in raw material prices and depreciating foreign currencies, which are weighing on the company's margins.

Additionally, weak consumer confidence and spending behavior along with macroeconomic factors including increase in fuel and energy costs, credit availability, high unemployment levels, and high household debt levels may dampen the company's results. Moreover, Gap's operating performance faces a major threat from the prevailing weak macroeconomic conditions in the emerging markets as well as in Canada, which contributes significantly to its revenues.

Currently, Gap carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Better-ranked stocks worth considering in the apparel-shoe retail industry include Citi Trends Inc. CTRN, Christopher & Banks Corp. CBK and Foot Locker Inc. FL. While Citi Trends and Chirstopher & Banks sport a Zacks Rank #1 (Strong Buy), Foot Locker holds a Zacks Rank #2 (Buy).