It is unlikely to escape the roller-coaster ride that the U.S. market has undergone lately, thanks to the concerns regarding a trade-war with China, the outcomes of the recent attack on Syria and anticipation of rate hikes by the Fed. During this time, we find The Gap Inc. (GPS - Free Report) as a stock that has shown relative stability and is a safe haven supported by its long-term earnings growth rate of 8%.
Gap’s Growth Story
In a market scenario, where apparel retailers are struggling with rising online competition and fast fashion brands alongside innumerable bankruptcy filings from industry players, Gap has been a survivor due to its consistent focus on enhancing product quality and responsiveness to changing consumer trends. It has been making constant efforts to bolster digital and mobile offerings alongside improving product acceptance.
Backed by these efforts, this Zacks Rank #2 (Buy) stock witnessed solid 26.1% growth in the past year, outperforming the industry’s 5.3% upside.
The company almost steered every market situation with its core Old Navy, Gap and Banana Republic brands. However, the tough retail landscape and increased competition from peers have eroded the company’s profits in the recent past. This led it to diversify into the growing athleisure market by launching a premium lifestyle and active-wear brand called Athleta, which has been a dire threat to leading athleisure products retailer, lululemon athletic inc. (LULU - Free Report) .
Further, the company has been witnessing solid growth for the Old Navy brand as evident from the robust comparable sales (comps) performance in the last few quarters. Backed by the prospects of these brands, the company announced a new growth strategy, focusing on its two growth brands: Old Navy and Athleta.
The company expects net sales of more than $10 billion and $1 billion, respectively, for each of the brands over the next few years, resulting from U.S. store expansion along with mobile and e-commerce growth. Additionally, the company plans to open 270 Old Navy and Athleta stores while simultaneously closing 200 underperforming Gap and Banana Republic stores over the next three years. In sync with this strategy, the company’s plan to open 25 stores in fiscal 2018 is likely to comprise more of Athleta and Old Navy stores while it plans to close down Gap and Banana Republic stores.
The company expects these new strategies to create about $500 million in expense savings over the next three years, a portion of which will be reinvested in its growth goals.
In a move to streamline its North American business, Gap is enhancing its e-commerce and omni-channel capabilities by adopting a number of initiatives. Notably, the company has increased online presence across all of its brands whereas its online division is one of its most profitable units, posting double-digit sales growth. Recently, the company announced to launch the buy online, pick-up in store service, a new personalization engine that is powered by customer data and continued significant investment in its omni-channel services. We believe that all these initiatives, combined with constant digital investments, should boost Gap’s top line in the long run.
Solid FY18 View
Reflecting an increased confidence in its balanced growth strategy and a momentous growth in earnings capacity, Gap provided a robust outlook for fiscal 2018. Going forward, it expects significant earnings growth, driven by the recent tax reform.
The company envisions adjusted earnings for fiscal 2018 to be $2.55-$2.70 per share. Further, comps are anticipated to be flat to up slightly. The company’s earnings guidance reflects about 7 cents positive impact from currency fluctuations. Moreover, the effective tax rate for fiscal 2018 is expected to be nearly 26%, backed by the impacts of the recent tax reform.
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Other top-ranked stocks in the retail sector include The Buckle, Inc (BKE - Free Report) and Urban Outfitters, Inc. (URBN - Free Report) . Buckle sports a Zacks Rank #1 (Strong Buy), while Urban Outfitters carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Buckle has delivered an average positive earnings surprise of 9.1% in the trailing four quarters. It has gained 11.6% in the past month.
Urban Outfitters, with long-term earnings growth rate of 12%, has surged 10.8% in the past month.
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