Gap's Strategies Drive Comps - Analyst Blog

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Gap Inc. ( GPS ) witnessed considerable recovery in its comparable sales and total sales performance, driven by its relentless efforts to be on the growth curve. The company's efforts have paid off well in an economy, which is looking for ways to shield itself from the financial turmoil that seems to have no end.

During the period from February to July, the company registered improvements in comparable sales in each month, except April. During that period, comps growth touched a low of negative 2% and a high of 10%, thereby recording average growth of approximately 4%. In the first six months of fiscal 2012, comps increased 4% in February, 8% in March, 2% in May, flat in June and 10% in July, while it declined 2% in April.

Monthly sales data for Gap also showed a decent performance. Within February to July 2012, the company registered a minimum year-over-year flat sales growth and a maximum growth of 12%, reflecting an average growth of approximately 6% for the period. The company registered sales growth of 6% in February, 10% in March, flat in April, 4% in May, 2.2% in June and 12% in July.

Fiscal 2011 Sales: A Recap

In fiscal 2011, Gap reported a decline in comparable sales every month, except April and June. Lackluster sales in the North American region have continuously dragged down Gap's comparable store sales throughout fiscal 2011. During the fiscal, the company reported a decline of 4% in comparable sales compared with an increase of 2% during the same period in fiscal 2010. Accordingly, Gap's net sales inched down 1% to $14.55 billion from the prior-year sales of $14.66 billion.

Initiatives Taken to Rebound Top Line

In an effort to improve customer experience and enhance productivity per square footage, the company plans to strategically close and consolidate square footage at Gap and Old Navy brands. Gap intends to deliberately 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 is planning aggressively to expand its international and franchise business. Moreover, it intends to increase Gap store count in China from 15 to approximately 45 during current fiscal.

In a drive to boost its international operations, Gap also consolidated its foreign business under one division in London. Lackluster sales in North America compelled the company to explore the overseas market. In order to counter the domestic market saturation, Gap is aiming to generate 30% of total sales from overseas operations and online business by fiscal 2013. To achieve this, Gap has opened stores in China, Italy and Australia, and has launched the e-commerce business in more than 90 markets. These moves are expected to further strengthen its top and bottom lines, moving forward.

Results so far

Despite a consistent weak performance in all four quarters of fiscal 2011, the company reported a strong result for the first quarter of fiscal 2012 with net sales increasing 5.8%. The robust performance was primarily driven by a 4% growth in comparable store sales. As a result of the increased top line, the company's earnings climbed 17.5% year over year to 40 cents per share.

During the second quarter of fiscal 2012, Gap's net sales grew 5.6% year over year primarily driven by 4% increase in comparable store sales. On the back of increased sales along with improved margins and lower share counts, the company's earnings per share climbed 40% year over year to 49 cents from 35 cents earned in the prior-year quarter.

Bolstered by better-than-expected quarterly performance so far during fiscal 2012, the company raised its earnings guidance for the current fiscal to $1.95 - $2.00 per share from $1.78 - $1.83 projected earlier. Moreover, Gap is now anticipating an 11% rise in operating margin during fiscal 2012, up from previous guidance of 10%.

Our Recommendation

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 the company drive value proposition. Moreover, Gap's globally recognized brands complement each other, enabling it to leverage its position in the sector.

Gap, which competes with American Eagle Outfitters Inc. ( AEO ) and The TJX Companies Inc. ( TJX ), currently holds a Zacks #1 Rank, which translates into a short-term Strong Buy rating. However, we remain slightly cautious on the stock and uphold our long-term 'Neutral' recommendation until we s see further catalysts before becoming more positive on the stock.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AEO , GPS , TJX

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