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On Dec 11, 2013, we reiterated our long-term Neutral recommendation on global apparel retailer, The Gap, Inc. (GPS - Analyst Report), with a target price of $41.00.

Why Reiterate?

Gap is a leading player in the highly fragmented specialty retail sector and offers 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 third-quarter fiscal 2013, in which Gap posted impressive top and bottom-line performances that handily beat the Zacks’ expectations.

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

Furthermore, we believe that the 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 focus on controlling inventories and maximizing gross profits.

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 repurchase shares and boost shareholder value by consistently increasing dividend.

However, we remain slightly cautious about the stock’s future performance due to a possible rise in 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). Some better-ranked stocks in the apparel retail sector include Hanesbrands Inc. (HBI - Analyst Report), Citi Trends, Inc. (CTRN - Analyst Report) and Michael Kors Holdings Ltd. (KORS - Analyst Report). While Hanesbrands has a Zacks Rank #1 (Strong Buy), Citi Trends and Michael Kors carry a Zacks Rank #2 (Buy).

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