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A Few Reasons Why Gap Could Be a Good Investment

April 17, 2014 | About:
Suravi Thacker

Suravi Thacker

1 followers

Fashion retailers suffered during the holiday season as footfall at malls decreased and the colder weather kept customers at home. Moreover, weak consumer confidence also took a toll on apparel retailers’ sales. Nonetheless, there were retailers who managed to buck the trend by undertaking various strategies such as offering deep discounts and tapping the latest fashion trends which lured customers to stores.

A typical example in this context is Gap (GPS), which followed this strategy and witnessed a better holiday season. Its fourth-quarter results came in ahead of the Street’s expectations, sending its stock price north.

The Efforts Paid Off

Revenue dropped 3.2% to $4.58 billion over the prior year’s quarter, mainly because of one less week due to a calendar shift. In fact, the retailer managed to attract customers by promoting its products heavily. This led to a same store sales growth of 1%. Gap was able to sell its products more than other retailers, mainly because it caters to all age groups, including men, women and children. Also, it taps into hot fashion trends by providing products according to the changing tastes and preferences of people.

One of the key drivers of Gap’s performance is its focus on growing its footprint. During the year, the retailer opened 34 Gap stores in China, enhancing its footprint in the region. Also, it expanded its presence in Japan by opening 17 Old Navy stores. Moreover, the apparel company is focusing on growing its franchise network as it opened 70 such stores in 2013.

Gap also strengthened its omnichannel network, which enabled it to register online sales growth of 15.9% over last year’s quarter, clocking $698 million.

Although earnings also decreased to $0.68 per share from $0.73 per share a year ago, it beat the estimate of $0.66 per share. The bottom line was affected due to higher discounts provided in order to attract more customers. However, efficient cost management measures enabled the retailer to partially offset the effects of giving deep discounts and increased marketing.

Gap’s Efforts to Consider

Gap is making a large number of efforts which makes the company look increasingly attractive. First, it has been expanding its footprint, especially in the international market. After opening the first Old Navy store in China on March 1, the company plans to add another five during the year. In fact, Gap plans to open a total 185 stores in the current fiscal year with primary focus on China and Japan.

Along with introducing new products, the apparel company has increased its marketing efforts. For example, it provides “Find in store” and “Reserve in store” facilities which help customers find nearby Gap stores and reserve products for trial. By providing the ease of shopping through mobile devices, Gap has been able to grab customer attention. Also, it plans to introduce self-service kiosks at its stores which should make shopping easier.

Since e-commerce has been growing, it plans to expand its online presence also. Gap announced its plan to launch online shopping websites in China and Japan.

However, the specialty retailer’s dull outlook was a point of concern for investors. It expects earnings to be in the range of $2.90 and $2.95 per share, whereas analysts’ estimates were at $3.02. The weak outlook was mainly due to unfavorable currency movements and heavy promotions expected in the months to come. Also, Gap has increased wages given to employees. According to the retailer, these costs will not be passed on to the customers in terms of higher prices. Hence, the company expects it to weigh on its bottom line.

Conclusion

There is more than one reason to believe in Gap’s prospects. Numbers ahead of estimates, expansion into new regions, efforts to attract customers and a growing online business make this company lucrative enough. Moreover, it has increased its dividend by 10% to $0.88 per share. On the other hand, a weak outlook is nothing but the effect of various strategic measures undertaken and seems to be temporary. Therefore, this company should be owned from a long-term perspective.


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