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Upgraded Research Report on Gap

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On Apr 11, 2014, we issued an updated research report on The Gap, Inc. (GPS - Free Report) .

Gap recently posted fourth-quarter and fiscal 2013 results, wherein its quarterly earnings of 68 cents a share tanked 6.9% year over year. However, it came ahead of the Zacks Consensus Estimate of 66 cents per share. Net sales slipped 3.2% to $4.58 billion during the fourth quarter, almost meeting the Zacks Consensus Estimate of $4.59 billion. Results were negatively impacted by the loss of a week owing to calendar shift.

However, sales for fiscal 2013 climbed 5% to $16.15 billion, driven by comparable store sales, which inched up 2% during the year. Also, fiscal-2013 earnings of $2.74 a share soared 17.6%, marginally beating the Zacks Consensus Estimate of $2.73.

Looking ahead, Gap envisions earnings per share to lie in a band of $2.90–$2.95 for fiscal 2014. Excluding the expected negative effect of foreign currency, the company anticipates operating margin to expand in fiscal 2014. Further, it forecasts inventories to advance by 7% at the end of the first quarter of fiscal 2014.

Moreover, we believe that Gap’s current marketing strategy to drive comps will continue to reap positive results, going forward. The company has been adopting a more proactive approach to increase traffic. We also commend Gap’s consistent endeavors to keep itself on the growth trajectory, which has helped it to produce desirable results amid a soft economic environment.

As part of these endeavors, the company has shifted focus to improving its e-Commerce business to catch up with the changing customer preferences and streamline its North American business. Today, consumers prefer online shopping to walking into stores as it saves time and provides ease. As a result, in 2013, Gap introduced find-in-store and Reserve-in-Store in select locations, for which it received a positive response from its customers.

In fiscal 2014, the company intends to extend the Reserve-in-Store facility to most of its stores, which we believe will boost its top line.

Additionally, this premier international specialty retailer is making significant efforts to increase its global appearance. Over the past few years, the company has aggressively expanded its global footprint across emerging markets including China, Russia, South Africa and certain Latin American countries. Gap’s globally recognized brands complement one another, enabling it to leverage its position in the $1.4 trillion global apparel retail market.

Gap also has a track record of disciplined capital management while maintaining a strong balance sheet. The company generates a strong free cash flow, which helps boost earnings per share through large stock repurchases and further enhance shareholder value by consistently raising its dividend. These factors speak positively of the company’s future growth and instill confidence among investors.

However, we remain slightly cautious about the stock’s future operating performance due to a rise in raw material prices and depreciating foreign currencies, which is weighing on the company’s margins.

Gap currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Other better-ranked retail stocks worth investment include Barnes & Noble, Inc. , Bon-Ton Stores Inc. and Rite Aid Corp. (RAD - Free Report) , all holding a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on GPS
Read the Full Research Report on RAD
Read the Full Research Report on BKS
Read the Full Research Report on BONT

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