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Gap Is A Promising Long-Term Investment

April 27, 2014 | About:
rusticnomad

rusticnomad

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Apparel retailer Gap (GPS) recently announced its financial results, with the company achieving double-digit growth in EPS once again. The primary reason behind this extraordinary growth story is sales gains in January, along with growth in its different brands and e-commerce. Moreover, Gap’s cost cutting initiatives further helped with its earnings growth, while many apparel retailers struggled due to severe weather conditions in the U.S. For example, both American Eagle (AEO) and Urban Outfitters (URBN) were severely affected due to the cold weather, but Gap managed to maintain healthy earnings.

Growth moves

The company opened 500 stores globally, which led to the solid performance. Currently, Gap is focusing on moves such as opening new stores globally, with the integration of both physical and digital segments. In addition, Gap plans to invest in marketing initiatives to increase awareness of its brands globally, along with omni-channel growth.

Gap’s flexible economic growth model enabled it to gain market share in North America. The traditional in-store business moved toward digitalization. This new model helped the company reduce costs and enhance efficiency and productivity. While other established North American apparel retailers such as Urban Outfitters and American Eagle were struggling, this could be considered as remarkable.

Peers are not in good health

American Eagle recently reported its results and it was hurt badly by the effect of a cold winter. American Eagle was forced to reduce its outlook for the current year. Though American Eagle is working to bring new and exciting products to the market, coupled with improving engagement of customers, so investors should bet on investing in Gap with its better growth prospects.

Urban Outfitters also struggled in the previous quarter with young customers looking for other options. Revenue from Urban Outfitters’ namesake brand, its largest source of revenue, dropped 9%. However, Urban Outfitters’ revenue was helped by its two other brands, Anthropologie and Free People. Gap could utilize its large number of stores and wide product assortment to distribute the risk over a wider spectrum.

Gap has about 3,600 stores inclusive of franchises. It has also made considerable digital investments. Gap’s reserve in store and find in store are unique initiatives which help customers find a product they like and pick it up from any of the stores located nearby.

Gap is targeting four global strategic priorities. First, it plans to expand the success illustrated in the domestic market to everything on an international level. In the future, Gap plans to open specialty stores, as well as outlet stores abroad. Second, the company is focusing on omni-channel through the reserve in store and find in store initiatives. Finally, Gap is busy with its strategic priority to create a better image and faster processing times online through all devices.

Conclusion

The consistent performance of Gap puts it into the bracket of attractive investments. Its strategic priorities will help it capture market share and create brand awareness globally. In addition, the company is cheap in comparison to its growth. Considering the trailing P/E and forward P/E ratios of 15.3 and 12.6 respectively, and earnings growth CAGR for the next five years of 13%, Gap looks like a promising investment option.


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