Is Turnaround in the Cards for Gap?

Holiday sales figure is bringing a broad smile back to majority of soft-line retailers. However, can Gap Inc. (GPS - Analyst Report) join the pool of retailers who are currently cheering the holiday sales?

Sadly, the company is caught up with several challenges during this busiest shopping season of the year. Adding to the agony is the disappointing Black Friday sales result of the company.

What remains the drag?

Lackluster sales in North American region have continuously dragged down Gap’s comparable store sales throughout fiscal 2011. The company is losing market share against its rivals such as American Eagle Outfitters Inc. (AEO - Analyst Report) and The TJX Companies Inc. (TJX - Analyst Report). Moreover, the Black Friday weekend did not help the company to inflate its sales figures in November 2011. However, the company is taking strategic steps to counter the domestic market saturation.

Perhaps, a Year to Forget

Since the beginning of fiscal 2011, i.e., February 2011, Gap has reported a decline in comparable sales in every month, leaving April and June as an exception. Year-to-date the company has reported a decline of 3% in comparable sales compared with an increase of 3% during the same period in fiscal 2010. Accordingly, Gap’s year-to-date net sales declined 1% year-over-year to $11.73 billion.

During the last three quarters of fiscal 2011, the company’s declining comparable sales has negatively impacted its quarterly performance. Comparable sales in first quarter declined 3%, which resulted in a decline of approximately 11% in earnings per share. During second quarter, Gap’s earnings per share declined approximately 3%, primarily due to a decline of 2% in comparable sales. The third quarter was also not a happy tale for the company, as its comparable sales fell massively by 5%, dragging earnings per share down by 21%.

Strategic Moves

In an effort to improve customer experience and enhance productivity per square footage, the company intends to strategically close and consolidate square footage at Gap and Old Navy brands. Gap wants to strategically reduce its Gap North America store counts to 950 by the end of fiscal 2013, consisting 700 specialty stores and approximately 250 outlets.

Contrary to this, the company is planning aggressively to expand its international and franchise business. The company intends to triple the Gap store count in China from 15 to approximately 45 during the next 12 month period. Moreover, the company is anticipating opening a total of 60 new franchise stores by the end of fiscal 2011, of which it has already opened 33.

Moreover, in a drive to boost its international operations, Gap consolidated its foreign business under one division in London. Lackluster sales in North America compelled the company to explore the overseas market. In order to counter the domestic market saturation, Gap is aiming to generate 30% of total sales from overseas operations and online business by 2013. To achieve this end, Gap has opened stores in China, Italy and Australia, and has launched the e-commerce business in more than 90 markets, which are expected to further strengthen its top- and bottom-lines, moving forward.

Conclusion

We believe that the company’s long-term strategic moves along with disciplined cost management measures will not only provide financial flexibility, but will also help to drive value proposition. Moreover, Gap’s globally recognized brands complement one another, enabling it to leverage its position in the sector.

Currently, Gap’s shares maintain a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. Our long-term recommendation on the stock remains ‘Neutral’.

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