On Jun 18, 2014, we issued an updated research report on
) after the company posted first-quarter fiscal 2014 results
followed by positive comparable store sales (comps).
Gap's initiatives of enhancing its omni-channel capabilities,
energizing global growth and managing its inventory effectively
were well reflected through its top-line growth in first-quarter
fiscal 2014. The company displayed sales growth of 1.2% despite
severe winter weather conditions in the initial part of the
quarter, slow start of the spring selling season and unfavorable
foreign exchange rates.
However, bottom line failed to deliver desired results and fell
18.3% year over year. The decline was due to higher cost of goods
sold and occupancy expenses along with unfavorable foreign currency
With continued focus on developing its omni-channel network, Gap's
quarterly online sales came in at $575 million, up 13% from the
prior-year quarter. Looking ahead, management reiterated its
earnings guidance of $2.90-$2.95 per share for fiscal 2014.
Following the mixed results last month, the company recently posted
1% increase in comps for the 4 weeks ended May 31, 2014 compared
with 7% growth registered for the 4 weeks ended Jun 1, 2013, driven
by strong results at its Banana Republic and Old Navy stores.
Moreover, net sales in May totaled $1.27 billion, up 4% compared
with the prior-year period sales of $1.22 billion.
Gap is a leading player in the highly fragmented specialty retail
sector, offering a diverse range of clothing, accessories and
personal care products for men, women, children and infants. Its
flagship brands include Gap, Banana Republic, Old Navy, Piperlime
and Athleta. The company's globally recognized brands complement
one another, enabling it to leverage its position in the sector.
The company current marketing strategy is focused on driving comps
and is expected to continue showing positive results going forward.
The company has been adopting a more proactive approach to increase
In an effort to penetrate deeper into the $1.4 trillion global
apparel retail market, the premier international specialty retailer
is focusing more on increasing its worldwide presence. Over the
past few years, the company has aggressively expanded its global
footprint across emerging markets including China, Russia, South
Africa and certain Latin American countries. Meanwhile, it has
adopted a policy of strategically reducing its exposure in the
North American market, which is witnessing sluggish growth and high
competition. We believe the fading brick-and-mortar retailing
concept in the United States is a major reason behind Gap's
expansion of its footprint overseas.
However, we remain slightly cautious about the stock's future
operating performance due to rise in raw material prices and
depreciating foreign currencies, which are weighing on the
Additionally, weak consumer confidence and spending behavior along
with macroeconomic factors including increase in fuel and energy
costs, credit availability, high unemployment levels, and high
household debt levels may dampen the company's results. Moreover,
Gap's operating performance faces a major threat from the
prevailing weak macroeconomic conditions in the emerging markets as
well as in Canada, which contributes significantly to its revenues.
Currently, Gap carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Better-ranked stocks worth considering in the apparel-shoe retail
Citi Trends Inc.
Christopher & Banks Corp.
Foot Locker Inc.
). While Citi Trends and Chirstopher & Banks sport a Zacks Rank
#1 (Strong Buy), Foot Locker holds a Zacks Rank #2 (Buy).
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