We are maintaining our long-term Neutral recommendation on
Gap Inc
. (
GPS
), with a target price of $28.00. However, based on Gap's
considerable recovery in its comparable and total sales performance
so far in fiscal 2012, the company holds Zacks #2 Rank, implying a
short-term Buy rating.
Monthly sales data for Gap inducates a decent performance.
Within the period from February to May 2012, the company registered
a minimum year-over-year flat sales growth and a maximum growth of
10%, reflecting an average growth of approximately 5% for the
period. The company registered sales growth of 6% in February, 10%
in March, flat in April and 4% in May.
Moreover, despite a consistent weak performance in all four
quarters of fiscal 2011, the company reported a strong
first-quarter 2012 result with net sales increasing 5.8%. The
robust performance was primarily driven by a 4% growth in
comparable store sales. On the back of increased top line, the
company's earnings climbed 17.5% year over year to 40 cents per
share.
Further, better-than-expected quarterly performance has prompted
management to raise its fiscal 2012 earnings guidance. The company
now expects earnings in the range of $1.78 to $1.83 per share for
fiscal 2012, up from $1.75 to $1.80 forecasted earlier, reflecting
an increase of 14% to 17% from fiscal 2011. The current Zacks
Consensus Estimate stands at $1.91 per share. Gap still anticipates
an increase of 10% in operating margin during fiscal 2012.
In addition, Gap has been making significant progress in its
long-term plan by reducing dependency on North American specialty
business while increasing its online presence as well as expanding
its international operations.
During first-quarter 2012, the company closed net 20 stores
domestically and opened net 9 stores globally, thereby growing its
international presence. Going forward, Gap is aiming to generate
30% of total sales from overseas operations and online business by
2013, which is expected to further strengthen its top and bottom
lines.
Besides, in an effort to improve customer experience and enhance
productivity per square footage, the company intends to
strategically close and consolidate square footage at Gap and Old
Navy brands. Gap plans to strategically reduce its Gap North
America store counts to 950 by the end of fiscal 2013, including
700 specialty stores and approximately 250 outlets.
Contrary to this, the company continues to aggressively expand
internationally through both company-operated and franchise stores.
Gap intends to triple its store count in China from 15 to
approximately 45 during fiscal 2012. Additionally, the company aims
to grow its Athleta stores count 5 times from 10 to 50 by the end
of fiscal 2013.
However, Gap's business is seasonal in nature and generates a
high proportion of sales during the fourth quarter, the crucial
holiday season. Furthermore, the company ramps up its merchandise
levels in anticipation of the season, exposing itself to
significant risks, if the season fails to deliver expected
operating performance.
Moreover, due to its exposure to the international market, Gap
remains prone to currency fluctuation. The weakening of foreign
currencies against the U.S. dollar may require the company to
either raise prices or contract profit margins in locations outside
the U.S. An increase in product prices may have a direct impact on
consumer demand.
Above all, Gap operates in a highly fragmented market and
competes with national and local department stores and discount
stores,
American Eagle Outfitters Inc.
(
AEO
) and
The TJX Companies Inc.
(
TJX
), which offer products at fire sale prices. To retain the existing
market share, the company may have to reduce its sales prices,
which could affect its margins.
However, we believe that the company's long-term strategic moves
along with disciplined cost management measures will not only
provide financial flexibility, but will also help to drive value
proposition. Moreover, Gap's globally recognized brands complement
one another, enabling it to leverage its position in the
sector.
AMER EAGLE OUTF (AEO): Free Stock Analysis
Report
GAP INC (GPS): Free Stock Analysis Report
TJX COS INC NEW (TJX): Free Stock Analysis
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