Mind the Gap's earnings

Reports of the apparel retailer's demise are exaggerated.

By Jonathan Berr Mar 1, 2012 12:25PM

Gap (GPS), the apparel retailer that pundits had dismissed as a has-been, still has a few tricks up its sleeve.

The parent of Old Navy and Banana Republic last week reported better-than-expected fourth-quarter results. On Thursday, the company said that February sales also topped analysts' forecasts and underscored the strength of the economic recovery.

Net sales for the four-week period ended Feb. 25 rose 6% to $874 million. Comparable sales, which include online revenue, rose 4% in February, reversing a 3% decrease a year ago. There was strength across the board in North America sales. Banana Republic's sales posted a 12% gain, Old Navy's rose 5% and Gap's increased 1%. All three chains erased losses from a year earlier.

 

Wall Street likes what it sees. The results were an improvement over the numbers reported in the fourth quarter when Banana Republic and Old Navy each posted a 1% gain, and Gap's comparable sales fell 2%.

Gap is hardly alone. Many boats are being lifted by the rising tide of consumer confidence. Limited Brands (LTD), Macy's (M), Target (TGT) and Costco Wholesale (COST) also reported February sales that surpassed analysts' expectations. None, however, has seen the dramatic turnaround that the Gap has experienced.

A year ago, pundits were describing Gap's earnings as a "disaster." Perhaps expectations got so low that the company was able to beat them. With a 40% decline in fourth quarter results, Gap is hardly out of the woods. It still, however, got plenty of life, and that's what's got Wall Street excited.

Shares of Gap, which have surged more than 30% this year, rose $2.31, or 9.89%, to $25.67 in early trading. That move blew away the $22.55 average one-year price target of Wall Street analysts. The stock, though, appears to be reasonably valued, trading at a price-to-earnings ratio of 14.7, which is under its five-year high of 17.71, according to Reuters.

 

Gap has already reached out to shareholders by increasing its dividend by 13% and announcing a $2 billion share repurchase program. The company also has an aggressive expansion plan that will add stores overseas and shut poorly performing locations in the U.S.

Investors may want to hold off purchasing shares of Gap, or any other retailer for that matter, until there is some clarification about gas prices. Gas that costs $5 a gallon could be the pin that pops the retail sales bubble.

Jonathan Berr is long Target.

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