The Gap Inc. (GPS): There Are No Gaps in This Retailer’s Performance

Page 1 of 2

The Gap Inc. (NYSE:GPS) is easily one of the better performers in the apparel retail industry. The company has kept investors happy with stock price appreciation of 37% in past 12 months, along with a small but safe dividend that yields 1.5%.

The Gap Inc. (NYSE:GPS), in fact, has this ability to keep its earnings per share moving north even with moderate financial performance. Over the last five years it has clocked a compounded annualized EPS growth rate of 17%. With its well-planned growth strategies, that momentum should continue.

Profit never goes out of fashion

The Gap Inc.Gap substantiated this amply in its first quarter. Net sales were up 7% to $3.73 billion, lapping up a 5% increase last year. Same store sales were up 2%, buoyed by the namesake brand and Old Navy, both of which grew 3%.

The company grew its earnings by 51% y-o-y to $0.71 per share. This is impressive even after factoring in the tax gains and seasonality, and more so if we consider how some of The Gap Inc. (NYSE:GPS)’s peers fared.

Abercrombie & Fitch Co. (NYSE:ANF) reported a 15% decline in same store sales, and net sales declined 9% to $838.8 million. Although it improved its bottom-line performance, earnings are still in the red at a loss of 0.09 per share. The company is facing problems with inventory management–last year it had excess, and this year it didn’t have enough to generate top-line growth.

Teen retailer American Eagle Outfitters (NYSE:AEO) also witnessed its same store sales plummet 5%, while total revenue decreased 4.1% to $679.5 million. Adjusted earnings declined from $0.22 per share, a year ago, to $0.18 per share in the current quarter. While the company cited weather and economic weakness for the fall, the underlying fact is that it is bowing down to competitive pressures.

Gap is deepening roots in domestic markets

Granted the US apparel sector is mature and does not offer rapid growth opportunities. But given that The Gap Inc. (NYSE:GPS)’s share is just 3.9% in this $300 billion market, it is still possible for the company to grow its market share. Management believes that 4.5% is achievable.

Gap is leveraging its brands optimally. It is maximizing gains from its flagship and other mature brands like Banana Republic and Old Navy by investing in omni-channels, closing non-profitable stores, etc. On the other hand, it is expanding its smaller brands like Atheleta, Piperlime, and Intermix.

With free cash balance of $1.6 billion there is no dearth of funds to propel these initiatives. None of The Gap Inc. (NYSE:GPS)’s rivals have similar cash balances to pour in growth initiatives. Abercrombie & Fitch Co. (NYSE:ANF) has around $555.9 million, while American Eagle has some $383.2 million.

Opportunities for smaller brands

It is a good time for Atheleta and Gap Kids to increase market share. Atheleta’s rival Lululemon Athletica inc. (NASDAQ:LULU) is witnessing public wrath over its see-through ‘yoga pants’ and child labor issues, while American Eagle Outfitters (NYSE:AEO) has discontinued its ’77 kids’ brand, making it easier for Gap Kids.

Gap has created solid platforms for leveraging these opportunities. It has transformed Atheleta from a catalog business into an integrated brand with 35 physical stores, with plans of adding 30 more through the year.

The company also fueled a lot of demand for Gap Kids last year with the launch of its first limited edition collection, where it partnered with designer Diane Von Furstenberg. It will launch the second collection this year.

There are good opportunities for Piperlime and the recently acquired Intermix. Piperlime will evolve from its online avatar and see addition of physical stores while Intermix, which has around 30 stores in US, will see both doubling of store count and an online platform to boost sales.

Omni-channel retailing

Omni-channel is the current retail mantra. Retailers are out to ensure that options are no longer limited by inventories carried at individual stores, and shopping is just a click away.

Page 1 of 2