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Why Now Is a Good Time to Hold On to This Stock

May 27, 2014 | About:
Suravi Thacker

Suravi Thacker

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The specialty apparel retailer Gap (GPS) reported its first quarter results last week which looked dull. Although the bottom line witnessed a sharp decline, the results managed to meet the analysts’ estimates. This was primarily because the company’s numbers were hampered by unfavorable currency fluctuations. Also, it faced the problem of a colder winter, which led to a fall in store traffic.

By the Numbers

Total sales rose 1.2% to $3.77 billion, over the prior year. However, on a constant currency basis, revenue actually grew 2% over the same period. Lower footfall at the stores was one of the key reasons for lower sales. This resulted in a same store sales decline of 1%.

However, the popularity of online shopping led to a 13% surge in online sales, clocking in at $575 million. Also, the women’s segment was one of the bright spots in the Banana Republic brand. Demand for its products was on a surge during the quarter.

But the company could not manage its costs efficiently. Hence, earnings dropped to $0.58 per share as against $0.67 per share in the previous year’s quarter. Also, higher promotions and discounts, in order to attract customers, weighed on the bottom line.

Gap was not the only retailer to witness lower demand. Even peer American Eagle Outfitters (AEO) posted a dull quarter recently wherein its top line dropped 5% to $646 million. Lower store traffic led to a fall of 10% in comparable store sales. Moreover, higher costs and increased markdowns led to a plunge in the bottom line to $0.02 per share, from $0.18 per share a year ago.

Plans for the Future

But Gap has some well-made strategies for its survival. First, it plans to expand its footprint in China and triple its sales from the region. Therefore, it will be expanding its store count in China, which should bring in additional revenue. On the other hand, peer American Eagle announced its plans to close 150 stores in the next three years because of its falling profits.

Also, Gap plans to expand its online business since this segment has been witnessing growth. In fact, it also plans to introduce the service of reserving merchandise online and picking it up from stores within a day. The retailer should benefit when this program is made available. Also, the specialty retailer will revamp the website for the Old Navy brand, which attracts value-conscious customers.

Moreover, the recent positives related to increase in the U.S. consumer spending as well as the consumer confidence index to 100 makes the future look bright. Additionally, the spring season should benefit all the retailers since people would now start going out of their homes and shopping for the new season.

It is probably because of the aforementioned factors that the company stuck to its guidance. These measures and macroeconomic factors will help the company witness better days.

Conclusion

Although the entire retail industry is facing a host of problems, each of them is trying to overcome the prevailing obstacles in their own way. Gap too has a number of strategies which should help the retailer boost its sales. Moreover, the company reiterated its guidance which pleased investors. Therefore, holding onto this specialty retailer is a good idea.


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