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Leading apparel retail chain, Gap Inc. (GPS - Analyst Report) posted strong December comparable-store sales (comps) that surpassed analyst expectations, as the company successfully lured customers to its stores during the holiday season via its product offerings and promotional activities. Comps were also driven by sustained strength in its North American brands portfolio.

December (five-week period ended December 29, 2012) comps at Gap rose 5% versus a 4% decline in the comparable prior-year period. Moreover, net sales in the month summed to $2.08 billion, up 5% compared with the year-ago period sales of $1.98 billion.

Comps at Gap North America increased 2% against a 4% decline recorded in the prior-year period. Banana Republic North America’s same-store sales inched up 1% versus 2% decline in December last year. Results at its Old Navy North America segment reflected a whopping 13% rise in comps compared with a 4% fall in the comparable prior-year period. However, comps at the International business fell 6% for the month compared with an equivalent decline recorded in the prior-year period.

Year-to-date through December 29, 2012, the company’s net sales climbed 6% to $14.52 billion compared with $13.72 billion in the year-ago period. Improvements in net sales were primarily driven by 4% growth in the company’s comps.

Concurrently, two of the company’s competitors – Ross Stores Inc. (ROST - Analyst Report) and Nordstrom Inc. (JWN - Analyst Report) – reported same-store sales for the month of December. Ross Stores recorded 6% growth in December comps, while comps at Nordstrom climbed 8.6%.

Gap is scheduled to release its January sales results on February 7, 2013.

New $1.0 Billion Share Repurchase Authorization

Concurrently, Gap’s board of directors approved a new $1.0 billion share repurchase program, which replaces its previous $1.0 billion authorization that was completed in the fourth quarter of fiscal 2012. Since the beginning of fourth-quarter of fiscal 2012 till January 3, 2013, the company has repurchased nearly 17 million shares for $539 million.

The company has always been committed to create value for its shareholders by returning capital in the form of dividends and share repurchases. This is evident from the company’s year-to-date cash disbursements totaling about $1.2 billion via dividend payments and share buybacks. The new program reflects the company’s sound financial position and its strength in generating healthy free cash flow, which allows the company to initiate growth initiatives and maximize shareholders’ wealth.

Conclusion

We believe that the company’s relentless focus on turnaround strategies for improvising the top line are paying off, which is reflected in its solid comps and sales performance in the recent months. The company has now posted positive comps for six consecutive months (July–December 2012).

Further, Gap’s long-term strategic moves, along with disciplined cost management measures will not only furnish it with financial flexibility, but will also help it reduce the operating expenses. Moreover, Gap’s globally recognized brands complement one another, enabling it to leverage its position in the sector.

Currently, Gap’s shares carry a Zacks #3 Rank (Hold) as we remain slightly cautious over the stock due to intense competition and risk of operating in overseas market.

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