Gap (GPS, Financial) released unimpressive results for the first quarter of fiscal 2015. The company’s sales declined and its margins eroded. Out of its three brands, Gap saw sales decline in Gap Global and Banana Republic Global. However, it is encouraged by the positive performance by the Old Navy Global brand, and it thinks that it will be a growth driver in the future and will also support its falling business.
On the other hand, the retailer also suffered on the back of currency fluctuations mainly in Japanese yen and Canadian dollar. After this not-so-impressive performance, management is still sticking to its previous guidance and is undertaking several strategies that can help it improve its performance in the future. Let us have a closer look at the overall underlying business.
The problem with Gap
The shares of the company also fell after it posted a soft performance. This is because the investors had been expecting a decent performance by Gap, but the results failed to impress the investors. This also affected its EPS and Gap’s EPS also fell short of last year’s same-quarter EPS by 3%. Considering the competition in the market and falling performance, Gap is now focusing on various initiatives to improve its profitability. It is seeing some positive customer response that has also encouraged it. Let us see.
Expecting better times
Old Navy Global is a segment of prime importance for Gap. It is pleased with the results this segment showed even in the soft market conditions. Solid traction growing in the women’s business seems promising and it can lead the company to better profitability. The product acceptance in this segment is impressive, and the company is now focusing on taking this to another level. Old Navy seems to have fired all its cylinders; the company is not only focusing on women’s segment but it is also seeing business opportunities across men’s, kids and baby segment. It is now working on adding value to its efforts.
In order to get Gap to a more consistent on-trend, the company is working very hard to change the product processes at Old Navy. The company will try to generate better cash flows on the back of it and will try to add value to its shareholder’s wealth. Is it really happening? Let us see the overall industry outlook for 2015 and find out if Gap is a wise investment as of now.
Conclusion
Moving on the fundamentals now, the stock looks reasonable with a trailing P/E of 13.25 while the forward P/E of 12.34 indicates decent earnings growth in the near term. The profit margin of 7.61% is also impressive and can help the company to gain market share in the near term as well. But as the prospects of overall industry looks quite shaky, the company may not be a good long term holding as the company’s earnings are growing at a CAGR of just 9.00% which is less than the industry average of 14.07%. Near-term investors can definitely pick Gap, but for the long term, I suggest investors look for other profitable stocks.
