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Gap (GPS) October Comps Down 1%, Old Navy Holds Strong

ZUMZ GPS GCO BOOT

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Specialty-retailer The Gap Inc’s (GPS - Free Report) sales performance has become a function of its Old Navy brand results, over the past few months. In an otherwise drab performance from the Gap and Banana Republic brands, Old Navy’s comparable store sales (comps) stands out, which is helping the company gain some confidence from investors.

Though Gap’s comps for the four weeks ended Oct 29 dipped 1%, compared with a 3% fall recorded last year, results largely gained from the positive customer response for its Old Navy product assortments.

However, comps for October were hurt by the campus fire that hit its distribution center in Fishkill, NY in August. The fire affected the company’s October comps by 3 percentage points.

Comps at Gap Global declined 7%, following a 4% dip recorded last year. Further, performance at Banana Republic Global continued to be weak, as the brand recorded a 4% drop, compared with a 15% decline last year. Old Navy on the other hand, spelled out positive results as comps grew 3% compared with 2% 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 4 percentage points. Further, Old Navy’s comps, though positive, bore approximately 1 percentage point impact from the fire.

Gap’s net sales for Oct 2016 were $1.20 billion, flat compared with the same period last year. Overall, the company noted that the merchandise margins for October were significantly 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.

Third-Quarter Sales Results

Coming to numbers for the third quarter, Gap’s net sales declined 1.6% to $3.80 billion, compared with $3.86 billion reported in the prior-year quarter. The company’s comps slipped 3% in the quarter, compared with a 2% fall noted in the year-ago period.

Comps at Gap Global declined 8% compared with a 4% dip recorded last year. Further, Banana Republic Global posted an 8% drop, compared with a 12% decline last year. Old Navy, on the other hand, reported comps growth of 3% compared with a 4% increase last year.

Brand-wise, the Fishkill fire hurt comps at each of the company’s brands during the quarter. Comps for Gap Global included about 4 percentage points impact from the fire, while comps for Banana Republic were hurt by nearly 2 percentage points. Further, Old Navy’s comps, though positive, bore approximately 1 percentage point impact from the fire.

Q3 Guidance

Based on the sales performance, the company expects to report earnings per share (GAAP) of 50–51 cents for fiscal third-quarter 2016. Excluding the effects of its store closures and streamlining initiatives, the company anticipates adjusted earnings per share in the range of 59–60 cents, which lies comfortably ahead of the Zacks Consensus Estimate of 53 cents per share.

The Background

Gap’s sales performance has been in the doldrums for quite a while now due to ever-changing fashion trends, slow traffic, currency headwinds and softness across the Banana Republic and Gap Global brands. However, management 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 worldwide.

Though the October 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.

Zacks Rank

Gap currently carries a Zacks Rank #2 (Buy). Investors can also count on similarly-ranked stocks like Boot Barn Holdings Inc. (BOOT - Free Report) , Genesco Inc. (GCO - Free Report) and Zumiez Inc. (ZUMZ - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Boot Barn Holdings has to its credit a long-term EPS growth rate of 14.5%. Estimates for the current fiscal year have moved north in the last 30 days.

Genesco has a positive record of earnings surprises in the trailing four quarters, with an average beat of 23.1%. The stock has seen positive estimate revisions for the current fiscal year over the last 60 days.

Zumiez has an average earnings beat of 32% in the last four quarters. Estimates for the current fiscal year have moved up in the last 7 days.

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