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Gap's (GPS) Turnaround Seems Likely: Stock Worth Holding?


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They say that “All that glitters is not gold.” So does it imply that all that is not glittering could be gold? Think about it.

Taking a look at premier international specialty retailer, The Gap, Inc. (GPS - Analyst Report) , we note that the company has been in the red zone for a while now, with its stock price down 8.1% year to date. This is mainly because Gap has been struggling with dismal comparable store sales (comps), which could be attributable to the ever-changing fashion trends, slow traffic and currency headwinds.

Softness across its Banana Republic and namesake brands have also been pressing concerns for the company. With so much going wrong at Gap, what still makes this Zacks Rank #3 (Hold) company look attractive for the long run? Let’s delve deeper and bring what’s hidden to the surface.

The Growth Drivers

Gap has been firing on all cylinders with regard to bringing a turnaround to its business. Recently, management chalked out various strategic plans to keep track of the accelerated pace of change in the apparel industry. The company intends to speed up its transformation plan by bringing meaningful changes to its product portfolio and operating capabilities worldwide.

In this regard, management plans to focus on growing Gap’s brands in regions which offer greater structural advantage and potential to expand market share, while closing the underperforming stores. Further, the company remains keen on streamlining its operating model by creating a more proficient global brand structure, which will enable its brands to utilize scale advantages more efficiently.

While these actions are likely to attract annualized sales loss and restructuring charges, they are anticipated to deliver annualized pre-tax savings of $275 million and operating margin growth of about 2 percentage points. Clearly, the company remains committed to positioning itself better for long-term growth by setting its priorities right and channelizing its resources accordingly.

Apart from this, Gap has been making significant efforts to penetrate deeper into the over $1.4 trillion global apparel retail market. Over the past few years, the company aggressively expanded its global footprint across emerging markets including China, Russia, South Africa and certain Latin American countries. Going forward, management intends to remain committed toward store growth, with primary focus on greater China, Athleta and global outlet stores.

Also, the brick-and-mortar retailing concept has been losing its luster over the past few years in the U.S. as consumers have gradually shifted to online shopping. To keep pace with this change, Gap is enhancing its eCommerce and omni-channel capabilities by adopting a number of initiatives like “find-in-store”, “Reserve-in-Store” and “Order in Store” facilities, across various stores. We believe that these initiatives will boost its top line in the long run.

If this is not enough to justify Gap’s “Hold” status, investors can satisfy themselves with the company’s financial flexibility and efficient capital allocation. Its strong free cash flow generation enables it to boost earnings per share through large stock repurchases, and helps enhance shareholder value via consistent dividend payments.

Hence, we believe that with all aforementioned factors at play, Gap has tremendous scope to come out of the woods, which makes it a good choice for the long term.

GAP INC Price and Consensus

GAP INC Price and Consensus | GAP INC Quote

Investors can further satiate their appetite with better-ranked apparel/shoe stocks like American Eagle Outfitters, Inc. (AEO - Analyst Report) , The Children's Place, Inc. (PLCE - Snapshot Report) and Urban Outfitters Inc. (URBN - Analyst Report) , each with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

American Eagle has a positive record of earnings surprises in the trailing four quarters, with an average beat of 9.3%. The stock has seen positive estimate revisions for the current fiscal year, over the last 60 days.

Children's Place has an average earnings beat of 33.1% in the last four quarters, and estimates for the current fiscal year moved up in the last 60 days.

Urban Outfitters has to its credit an average beat of 6.7% in the trailing four quarters and estimates for the current fiscal year have moved north in the last 60 days.

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