The Gap Delivers December Sales Upside Surprise

Net sales for the five-week period ending December 31, 2016, rose 3 percent to $2.07 billion from the same period a year ago. Comparable sales rose 4 percent during the same time compared to a 5 percent decrease a year ago.

Comparable sales by global brand for December 2016 were:

1. Gap Global: Positive 1 percent versus negative 2 percent last yearl.
2. Banana Republic Global: Negative 7 percent versus negative 9 percent last year.
3. Old Navy Global: Positive 12 percent versus negative 7 percent last year.

MKM Partners: 'Big Upside Surprise'

Roxanne Meyer of MKM Partners commented in a research report that the company's metrics at Old Navy and Gap represent a "big upside surprise."

At Old Navy, average unit revenue and conversion resulted in the positive comp and merchandise margin gains with particular strength observed in the women's category. Moreover, the brand's momentum bodes well ahead of the spring season.

The core Gap brand is showing signs of improvement but the segment isn't in full recovery mode just yet. Among the positives, the women's category continues to outperform men's which is an encouraging sign.

On the other hand, traffic trends however were merely in line with the industry at around negative 10 percent while margin gains will in part be offset by higher average unit costs to improve the product quality.

As such, the analyst is looking for signs of continued improvement into the spring season before a more constructive stance on the stock can be assumed.

Shares remain Neutral rated with an unchanged $28 price target.

Stifel: Holiday Winner

Richard Jaffe of Stifel commented in a research report that Gap achieved positive comps at a challenging time for many retailers.

Of particular note, the company's core Gap brand achieved its first comp sales gain during the holiday period in three years. Moreover, inventories were "exceptionally lean" at the end of December, which will limit gross margin erosion. On the other hand, the international segment is lagging the domestic brand in terms of sales, which held back total comps.

Jaffe added that the Old Navy brand's holiday product offering was on trend and helped drive sales. In addition, a strong marketing campaign achieved desired results and contributed to help drive traffic.

On the other hand, efforts to improve the Banana Republic brand, including a new leadership team and brand re-positioning have not been effective so far.

Despite the strong sales announcement, shares remain Hold rated with an unchanged $26 price target which implies a 13x multiple on the analyst's 2017 earnings per share estimate. The 13x multiple implies a premium to the stock's two-year average of the consensus out-year multiple and also reflects the company's potential turnaround prospects.