We have downgraded our long-term recommendation on
) to Neutral in anticipation of a possible rise in input costs
and increasing inventory level, which may slow down the company's
sales and margin growth trends. This Zacks Rank #3 (Hold) company
has a target price of $38.00.
Despite reporting strong quarterly results, we remain
apprehensive about the stock's future performance as margins are
likely to remain pressured by several headwinds. Going forward,
management stated that increased input costs and rising inventory
level are likely to take a toll on its margins.
We remain concerned about the company's rising inventory per
store level, which is facing a tough comparison from last year.
Overall, inventory is anticipated to increase in the mid
single-digit range at the end of first quarter of fiscal 2013. We
believe that these factors may limit the company's margin
Although its franchise business has performed impressively,
the international retail business remains weak, as evident from
its continual negative comps performance.
In addition, the company operates in a competitive environment
and strives to maintain its market share, actively competing with
numerous manufacturers and distributors of apparel and related
products. The company primarily competes on the basis of brand
recognition, fashion, price, service, store location, and
quality. Failure to offer high-quality differentiated products at
a competitive price may hamper Gap's market share, and thereby
its top and bottom-line performances.
However, we consider that the company may return on the growth
track in the long term with the help of its relentless endeavors
on turnaround strategies. We believe that the company's efforts
have paid off well over the past one year, resulting in improved
comps and sales performance.
Further, we believe that the company's acquisition of INTERMIX
Holdco Inc. during fiscal 2012 will not only help Gap in
expanding its brand offerings, but will regain its fashion
leadership status as well. Moreover, from a valuation
perspective, the stock looks attractive as it trades at a
discount to the industry average, based on forward earnings
estimates. Gap currently trades at a forward P/E of 13.64x, lower
than the industry average of 19.82x.
Other Stocks Worth Considering
Other stocks worth considering in the apparel retail industry
Ralph Lauren Corp
). All these companies carry a Zacks Rank #2 (Buy).
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