3/2/2012 3:44 PM ET|
More good news in store for Gap
The clothing retailer's stock, which is rallying on better-than-expected February sales, still looks like a buy.
Gap surprised Wall Street on March 1 by reporting a 4% increase in sales last month, compared with a 3% drop last year and analysts' expectations of a 1.4% decrease.
Investors cheered the outsize growth, sending the stock up 8.5% to $25.35 in morning trading. Yet we think the shares, which established a 52-week high of $26, will be in vogue for some time to come.
Many on Wall Street remain skeptical of the stock, but the impressive results demonstrate the company is making real strides in regaining its cachet among consumers.
Demand was strong across the board, with Banana Republic posting a 12% sales increase, well ahead of the consensus 2.5%. Old Navy's sales climbed 5%, more than double the 2% analysts had modeled, and the flagship Gap stores eked out a 1% sales gain -- the first time the metric has been in the black in nearly a year -- while Wall Street had forecast continued negative comparisons.
"Gap remains focused on executing a turnaround in the U.S. through investments in core categories across brands, e-commerce and Gap brand marketing," writes Standard & Poor's Capital IQ analyst Jason Asaeda. While he maintained a "hold" rating on the stock, he raised his target price and earnings estimates for the year, "with product costs easing and the company planning share buybacks," which should offset growth-related expenses.
February isn't traditionally a standout month for Gap, but the company's comparisons demonstrate that its key spring styles are resonating with shoppers -- a real victory early in the season that many didn't think Gap could pull off.
Although its international segment was the one negative point, recording a 9% decline in sales, the company is remaking itself into a global player, which should be a long-term benefit to shareholders. The company just opened its first stores in Central America, following its initial foray into South America in 2011.
Additionally, Gap's online presence allows it to offer more upscale options and to build relationships with consumers in countries where the company plans to expand. Management expects that overseas and online sales will account for 30% of sales by the next fiscal year.
"Going forward, the company stands to benefit from improving productivity thanks to a reduction in weak performing stores, growth in global locations, and most important, a revamped merchandising strategy," wrote Morningstar analyst Jaime Katz in a recent note.
Barron's magazine has been bullish on Gap in the past. Recently we argued that the chain was finally putting its fashion faux pas behind it and it looked ready to go on the offensive with a revamped product line and comprehensive growth strategy. The stock has risen 25.5% since that call, while the Standard & Poor's 500 Index ($INX) gained 8.4% during the same period.
Trading at less than 13 times forward earnings, Gap's stock isn't as cheap as it was at the end of last year, but it's still at the lower end of its peers' valuation range. And while the long-term growth rate, just shy of 10%, is below the industry average of 14%, Gap's 2% yield is still one of the highest in the group, as is its 24.4% return on equity. Moreover, earnings are projected to climb by double digits next year.
So we think Gap will continue to pull ahead of the pack.
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[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 added just over a point, holding its weekly gain at 1.0% while the Nasdaq lost 0.4%.
The major averages began the day on an upbeat note, but relinquished their opening gains during the first 90 minutes of action. The early sentiment was boosted by a better-than-expected nonfarm payrolls report for February (175K versus Briefing.com consensus 163K), but a closer look into the report suggested that ... More
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