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The Gap Inc. (GPS): Which Retailers Should We Buy Now?

Recently on Barron’s, Janney Capital Markets expressed its bullish view on June retail same-store sales growth. Despite sluggish sales in the first and second week of June, it expected sales and traffic will rise in July, especially for the teen retail segment.

With the expected positive retail activities, it was bullish about The Gap Inc. (NYSE:GPS), bebe stores, inc. (NASDAQ:BEBE), Pacific Sunwear of California, Inc. (NASDAQ:PSUN), and Urban Outfitters, Inc. (NASDAQ:URBN). Although the overall retail activities might pick up, investors should choose retailers to invest quite carefully based on their capital structure, operating performance, and valuation. Let’s take a look to see which retailer is a good buy now.

Which retailers are good now?

In terms of market performance, Pacific Sunwear of California, Inc. (NASDAQ:PSUN) is the most outstanding, with around 144% return since the beginning of the year, while Urban Outfitters, Inc. (NASDAQ:URBN) delivered the least for its shareholders, gaining only 6.12%. During the same period, bebe stores, inc. (NASDAQ:BEBE) and The Gap Inc. (NYSE:GPS) gained 43.75% and 40.63%, respectively.

How about their operating performance and their capital structure?

Market cap ($million) ROIC (%) D/E EBITDA multiple Dividend yield (%)
Gap 20,420 23.94 0.4 7.55 1.40
Bebe 454 -16.73 no debt N/A 1.70
Pacific Sunwear 265.4 -41.36 2 59 N/A
Urban Outfitters 6,140 19.73 no debt 10.83 N/A

The Gap Inc.The Gap Inc. (NYSE:GPS) is the biggest company with as much as $20.4 billion in market capitalization, while Pacific Sunwear of California, Inc. (NASDAQ:PSUN) is the smallest, being worth only $265 million on the market. Income investors might prefer Gap and bebe stores, inc. (NASDAQ:BEBE) with their decent dividend yields of 1.4% and 1.7%, respectively, whereas Pacific Sunwear and Urban Outfitters, Inc. (NASDAQ:URBN)have not paid any dividends yet.

Among the four companies, bebe stores, inc. (NASDAQ:BEBE) and Urban Outfitters, Inc. (NASDAQ:URBN)have the stronger balance sheet than the other two companies, employing no interest-bearing debt in their operations. The Gap Inc. (NYSE:GPS), with a debt/equity ratio of 0.4, seems to have a reasonable amount of leverage.

I would definitely not touch Pacific Sunwear of California, Inc. (NASDAQ:PSUN) at the moment because of its high debt/equity ratio, which could do the company more harm than good when the business is facing headwinds, which could be the result of fierce competition, weak retail industry environment, etc. Moreover, the company has generated losses with negative return on invested capital.

Gap is the most outstanding among the four

Of the four retailers, I like The Gap Inc. (NYSE:GPS) the most with its reasonable leverage, decent dividend yield, and the lowest EBITDA multiple. Gap has also been the most profitable retailer with the highest return on invested capital at 23.94% while Urban Outfitters, Inc. (NASDAQ:URBN)ranked second with 19.73% in return on invested capital.

In fiscal 2014, Urban Outfitters is looking to expand its business by opening around 35-40 new stores, including 16 Urban Outfitters, Inc. (NASDAQ:URBN) stores, nine new Anthropologie stores globally, and 14 new Free People stores in North America. The company expects to grow its gross margin by 50 basis points, driven by lower markdown rates and higher initial margins. The total capital investment, mainly for opening new stores, might stay in the range of $190 million to $210 million.

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