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Gap's (GPS) Strategic Plans Bode Well: Should You Hold?

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In an effort to penetrate deeper into the global apparel retail market, The Gap, Inc. remains focused on reinforcing its global footprint. The company intends to accelerate its transformation plan by bringing meaningful changes to its product portfolio and operating capabilities, worldwide. Alongside, management is developing a new product operating model to enhance speed, responsiveness and predictability.

The company has been focusing on fortifying its international presence. Over the past few years, Gap aggressively expanded its global footprint across emerging markets, including China, Russia, South Africa and certain Latin American countries. Meanwhile, it has adopted a policy of strategically reducing the Gap brand’s exposure in North America, by rightsizing its stores in the region, which have been witnessing sluggish growth and high competition.

In a move to streamline its North American business, Gap is boosting its eCommerce and omni-channel capabilities by adopting a number of initiatives. As part of its omni-channel endeavors, the company has been consistently extending its “find-in-store”, “Reserve-in-Store” and  “Order in Store” facilities across various outlets. We anticipate these initiatives to augment its performance, moving ahead.

GAP INC Price and Consensus

GAP INC Price and Consensus | GAP INC Quote

However, soft sales trends, weak demand and additional store closures pose serious threats to the company. Gap’s third-quarter fiscal 2016 results fell year over year, with sales marking the seventh straight quarterly decline. Further, its top line has underperformed the Zacks Consensus Estimate in five out of seven straight quarters.

Sales in the quarter were marred by soft demand, sluggish traffic, stiff competition from other apparel chains, and weakness across Banana Republic and Gap’s namesake brands. Also, a shift in consumers’ preferences to fast growing online retailers has been taking a toll on Gap’s comparable store sales (comps) and sales. Apart from these factors, comps in the third quarter were hurt to an extent of about 2%, by the campus fire that hit Gap’s distribution center in Fishkill, NY, in Aug 2016.

Nonetheless, Gap has been undertaking several contingency steps with regard to the Fishkill fire, in order to minimize the adverse effects from this calamity. These include its act of rerouting deliveries and increasing the staff strength at other facilities. Additionally, comps at Banana Republic Global, which was persistently hurt by declining comps, recorded positive comps of 5% in November compared with a 19% decline witnessed last year. Moreover, management remains on track with the execution of its holiday plans.

Bottom Line

Gap remains committed to position itself better for long-term growth, by setting its priorities right and channelizing its resources accordingly. Further, the company boasts a VGM Score of “A”, with a long-term earnings growth rate of 8.8%, both highlighting its inherent strength. We observed that shares of Gap have grown 2.4% in the past three months, outperforming the Zacks categorized Retail-Apparel/Shoe industry that declined 3.3%.



Zacks Rank & Key Picks

Currently, Gap has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , Tilly's, Inc. (TLYS - Free Report) and Zumiez Inc. (ZUMZ - Free Report) , all flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Children's Place, with a long-term earnings growth rate of 10.3%, has surged a whopping 82.7% year to date.

Tilly's, with a long-term earnings growth rate of 13%, has skyrocketed 129.4% in the past six months.

Zumiez, with a long-term earnings growth rate of 15%, has gained 45.7% in the past six months.

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