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Analyst Blog

We have reaffirmed our long-term Neutral recommendation on Calif.-based Gap Inc. (GPS - Analyst Report) with a target price of $44.00.

Why Reiterate?

Gap is one of the leading players in the highly fragmented specialty retail sector, offering a diverse range of clothing, accessories and personal care products for men, women, children and infants. We believe that its flagship brands – including Gap, Banana Republic, Old Navy, Piperlime and Athleta – complement one another, thereby strengthening the company’s position among apparel retailers. This was apparent from the bygone quarter, in which Gap posted impressive top and bottom-line performance, which easily surpassed the Zacks Consensus Estimate.

Moreover, Gap witnessed resurgence in its comparable sales and total sales performance, driven by its consistent endeavors to remain buoyed on the growth trajectory. The company’s turnaround strategies have paid off well as is evident from its comparable store sales performances over the last several months. During the period from Jan to May 2013, the company registered positive year-over-year comparable store sales growth in each month, except for March.

Furthermore, we believe that this Zacks Rank #2 (Buy) company has proved its merit in controlling expenses, and remains committed toward reducing costs across products and most operating categories. Moreover, Gap is adopting a balanced approach to revive its brands, while keeping its focus on controlling inventories and maximizing gross profits.

However, we remain wary of the stock’s future performance due to a possible rise in both input costs and inventory levels, which may consequently slacken the company’s sales and margin growth. Moreover, we are concerned about Gap’s global expansion plan in the face of its persistent negative international comps results. Alongside, stiff competition and lingering economic woes remain short-term deterrents for the stock.

Other Stocks to Consider

Other companies worth a look in the apparel retail industry include Foot Locker, Inc. (FL - Snapshot Report), Stein Mart Inc. and Pacific Sunwear of California Inc. (PSUN - Snapshot Report) – all of which carry a Zacks Rank #2 (Buy).

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