How the Gap got back in style
For the first time in nearly a decade, fashionistas and investors seem to agree that the retailer has found the right blend of style and business strategy.
Glenn Murphy, the CEO of Gap Inc. (GPS), might want to think about sending "Mad Men" creator Matthew Weiner a Jeroboam of champagne -- or even commissioning a special vintage in his honor -- as a vote of thanks.
After all, the clothing retailer's dramatic turnaround this year is due at least in part to the AMC television series and, in particular, the decision by Gap division Banana Republic to showcase "Mad Men"-themed styles (created with input from the show's costume designer) in its women's retail stores. Avid consumers have snapped the clothing up in hopes of emulating the on-screen flair of January Jones or Christina Hendricks.
That's welcome news for the Gap, which has been the laggard within the retail industry for longer than analysts or investors care to remember. Last November, when pre-holiday shopping was starting to pick up, the apparel companies tracked by Thomson Reuters as part of its retail universe reported a 4.4% increase in same-store sales for the month. Adding the Gap's plunging sales (same-store sales fell 5% that month) to the mix, and the group eked out a meager 1.4% advance.
Flash forward four moths, however, and the picture looks dramatically different, says Thomson Reuters analyst Jharonne Martis. According to same-store-sales estimates, March 2012 will be the first month since December 2010 that the Gap will record a gain in sales at stores that have been open for at least 12 months.
Martis has witnessed the trend firsthand. Last week, she headed out to BabyGap to buy a gift for a friend's newborn, and succeeded in snapping up the very last accessories in the 0-to-6-months size range in the store's new infant line designed by Diane von Furstenberg. On the New York subway, she overheard a group of twenty-something women discussing their Gap trip to acquire the season's must-own fashion item -- jeans in colors like "surf pipe blue," "lemon drop" and "fuchsia" (as well as more ordinary colors like fire-engine red and vivid green). "They were talking about how hot and in style those pants were," Martis says.
From brightly colored jeans at Gap stores to cigarette pants, cropped cardigans and sheath dresses at Banana Republic, Murphy's team may finally have found a formula -- other than frequent sales and hefty discounts -- that will tempt shoppers to come back. The turnaround began in February, when the Gap reported same-store sales rose 4% following a 4% slide in January; Banana Republic saw same-store sales gains double to 12% from a 6% advance in January. In March, Martis expects the data to show that the Gap recorded same-store sales gains of 5.4%, buoying the apparel group rather than being a drag on its results.
In response, analysts have started to upgrade their views on the formerly troubled retailer. Janney Capital Markets raised its rating on the stock from a "hold" to a "buy"; Bank of Montreal now views it as an "outperform" rather than a "market perform." While the turnaround hasn't yet shown up in the Gap's earnings (fourth-quarter net income plunged 40%), analysts are cautiously revising their forecasts for the company's 2012 profits higher.
It's still early in the turnaround, but it's the first time in nearly a decade that fashionistas and investors seem to agree that the Gap has found the right blend of style and business strategy. Most analysts still have a "hold" rating (or the equivalent) on the company, and it's already trading above the median stock price target of $25 a share (the high end of the range is $35).
Some argue that at current valuations, it looks like a stock to shun or to sell -- that the turnaround has been priced in. But there is plenty of room for the company to deliver a series of positive surprises on both same-store sales -- due out in just a few days -- and earnings, which the retailer expects to report in mid-May. That makes a great candidate to add to a portfolio as and when those more nervous investors edge back from a stock that has proved a chronic laggard in recent memory.
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