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Gap (GPS) Stock Gains Despite Fall in September Comps

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Shares of specialty-retailer The Gap Inc. (GPS - Free Report) rose 6.5% in the after-market trading session yesterday. While the company disappointed with another month of dismal sales performance in September, the results were slightly better-than-expected owing to the recovery at its Old Navy brand.

Sales for the Old Navy brand picked up in September mainly driven by a favorable response from customers for its product assortments.

Gap, which has been struggling with its top line and comparable store sales (comps) for a while now, continued to be impacted by softness across its Banana Republic and namesake brands. Additionally, sources revealed that stiff competition from fast-growing fashion retailers and a rapid shift in preference to online shopping have been the primary hurdles in Gap’s growth path.

Additionally, comps for September were hurt by the campus fire that hit its distribution center in Fishkill, New York in August. Sources revealed that majority of the damage done by the fire were related to the company’s namesake brand, primarily online. The fire hurt the company’s September comps by 3 percentage points.

Overall, the company marked that the merchandise margins for September were higher-than-estimated. This more than mitigated the negatives arising from the distribution center fire, mainly on estimated earnings due to lost sales and higher logistics costs.

Moreover, the company anticipates the fire related impacts to carry into October as well, bearing an equivalent impact as in September. The fire related effects are also expected to have a bearing on the company’s fourth-quarter fiscal 2016 results.

September Sales

Coming to numbers, Gap’s net sales for Sep 2016 dipped nearly 2% to $1.43 billion from $1.46 billion recorded in the same period last year. Additionally, the company’s comps for the month slipped 3%, compared with a 1% fall noted in the year-ago period.

Comps at Gap Global slumped 10%, following flat comps recorded last year. Further, performance at Banana Republic Global continued to be weak, as the brand recorded a 9% drop, compared with a 10% decline last year. Old Navy on the other hand, spelled out positive results as comps grew 4%, versus an equivalent comps growth witnessed last year.

Brand-wise, the Fishkill fire hurt comps at each of the company’s brands. Comps for Gap Global included about 5 percentage points impact from the fire, while comps for Banana Republic were hurt by nearly 3 percentage points. Further, Old Navy’s comps, though positive, bore approximately 2 percentage points impact from the fire.

Though Gap’s sales performance has been in the doldrums for quite a while now due the ever-changing fashion trends, slow traffic, currency headwinds and softness across the Banana Republic and Gap Global brands, management remains committed to enhance the performance of all of its brands. Further, this Zacks Rank #3 (Hold) company recently chalked out a fresh strategic plan 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 globally. Though the September sales results indicate that Gap is still not out of the woods, let’s see if the aforementioned efforts can bring about a turnaround in its business.

Stocks to Consider

Investors can count on better-ranked stocks like Urban Outfitters Inc. (URBN - Free Report) , The Children’s Place Inc. (PLCE - Free Report) and American Eagle Outfitters Inc. (AEO - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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.

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. Estimates for the current fiscal year moved up in the last 60 days.

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