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Analyst Blog

On Sep 18, 2013, we reiterated our long-term Neutral recommendation on global apparel retailer, The Gap, Inc. (GPS - Analyst Report), with a target price of $44.00.

Why Reiterate?

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. 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 is evident from the recently concluded  second quarter 2013, in which Gap posted impressive top and bottom-line performances, which easily surpassed the Zacks Consensus Estimate.

Further, Gap has a track record of disciplined capital management while maintaining a strong balance sheet. The company also generates strong free cash flow, which allows it to repurchases shares and also boost shareholder value by consistently increasing its dividend.

Recently, the company raised its dividend by 33.3% to 20 cents per share. Notably, Gap has raised its dividend tenfold from 2 cents per share in 2004 to the present amount of 20 cents. Moreover, Gap has returned over $14 billion to its shareholders through share repurchases and dividend payouts during the same time period.

Gap considerably improved in its comparable sales and total sales performance, driven by consistent endeavors to remain buoyed on the growth trajectory. The company’s turnaround strategies that included a shift from conventional advertising strategies (print, outdoor) to a more versatile and interactive campaign with emphasis on digital formats have paid off well as is evident from its comparable store sales performances over the last one year. During the period from Jan to Aug 2013, the company registered year-over-year comparable store sales growth in each month, except for March.

However, we remain slightly cautious about the stock’s future performance due to a possible rise in both input costs and inventory levels. Moreover, while its global expansion plan appears promising, the possibility of negative international comps results remains a concern. Alongside, stiff competition and persistent macroeconomic challenges continue to be short-term deterrents for the stock.

Other Stocks to Consider

Gap carries a Zacks Rank #3 (Hold). Other stocks that are worth a look in the retail sector include PCM, Inc. (PCMI - Snapshot Report), Kirkland's Inc. (KIRK - Analyst Report) and Citi Trends, Inc. (CTRN - Analyst Report). All of these carry a Zacks Rank #1 (Strong Buy).

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