We retain our long-term Outperform recommendation on leading
apparel retail chain,
Gap Inc.
(
GPS
), based on the company's strong quarterly performance and an
upbeat outlook. Moreover, the company's continued efforts to
remain on the growth path are paying off well. Additionally, the
company is exhibiting significant progress on its international
expansion strategy, making its presence felt globally.
Gap, which competes with
Ross Stores Inc.
(
ROST
), posted third-quarter earnings of 63 cents a share, in line
with the Zacks Consensus Estimate and surged 66.0% from the
year-ago quarter earnings of 38 cents. Strong earnings
performance was mainly driven by an increase in sales along with
improved margins and a lower share count. Net sales increased
8.0% year over year to $3.864 billion from $3.585 billion in the
comparable prior-year quarter and surpassed the Zacks Consensus
Estimate of $3.841 billion.
Moreover, the company registered growth of 6% in its comps
against a 5% decline in the prior-year period. Third-quarter
comps mainly benefited from the continued positive trend in its
North American business, Gap, Banana Republic, and Old Navy.
Further, management's cost cutting initiatives are helping the
company reduce costs and boost profitability.
Healthy quarterly performance prompted management to raise its
fiscal 2012 earnings guidance. The company now expects earnings
in the range of $2.20-$2.25 per share for fiscal 2012, an
increase of 41%-44.2% from fiscal 2011. Earlier, Gap was
expecting earnings in the range of $1.95-$2.00 per share for
fiscal 2012, an increase of 25%-28.2% from fiscal 2011.
We believe that the company's relentless focus on turnaround
strategies such as lowering domestic store counts while enhancing
international stores for improvising the top line is paying off,
which is evident from its solid comps and sales performance in
the recent months. The company posted positive comps for five
consecutive months (July, August, September, October and
November) this year.
As part of its strategy, the company is planning to deliberately
reduce its Gap North America store count to 950 by the end of
fiscal 2013, by shuttering 700 specialty stores and approximately
250 outlets. Contrary to this, the company continues to
aggressively expand on the international front through both
company-operated and franchise stores. Further, it is aiming to
generate 30% of total sales from overseas operations and online
business by 2013.
Gap has established a track record of conservative capital
management while maintaining a strong balance sheet. The company
also generates strong free cash flow, which allows it to grow
earnings per share through large stock repurchases and further
enhance shareholder value by consistently raising its dividend.
Gap's long-term strategic moves, along with its disciplined cost
management measures have not only provided it with financial
flexibility, but also helped reduce operating expenses. Moreover,
Gap's globally recognized brands complement one another, enabling
it to leverage its position in the sector. Currently, Gap's
shares maintain a Zacks #2 Rank, which translates into a
short-term Buy rating.
GAP INC (GPS): Free Stock Analysis Report
ROSS STORES (ROST): Free Stock Analysis
Report
To read this article on Zacks.com click here.
Zacks Investment
Research