After exhibiting tremendous resilience against the edgy retail environment and unfavorable climate conditions during the fourth quarter of fiscal 2013, Gap Inc‘s (NYSE:GPS) sales declined substantially in February 2014. Comparable store sales fell by 7% during the month after recording a modest growth of 1% in the holiday quarter. Management blamed store closures and low foot traffic on account of extreme cold for its dismal sales. 
The company’s performance was below par considering that it is one of the most popular brands in the U.S. and consumer spending was relatively better in February. However, we believe that Gap Inc can recover in the coming months as the company has been proactive in understanding its business needs. Historically, the retailer’s products have found strong acceptance among customers, and this trend is likely to continue with its spring collection. We are eager to see how the company’s upcoming March results turn out.
Our price estimate for Gap Inc is at $50, implying a premium of more than 25% to the market price.
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February Results Were Astray
Through most of last year, Gap Inc maintained a positive comparable store sales growth rate, despite the overall weakness in the U.S. retail industry. The company was among the few apparel retailers who were able to attract customers when U.S. buyers spent cautiously on clothing and showed low brand loyalty. While the holiday season was bleak for the entire industry, Gap Inc performed much better than its competitors. However, February was quite unusual for the company, as its comparable store sales declined substantially across its brands. For its namesake brand Gap, comparable sales declined by a staggering 10% versus 2% positive in the same month last year. Comparable sales for Old Navy and Banana Republic fell by 6% and 7%, respectively. 
The company stated that as much as 450 of its stores were closed on different occasions due to bad weather in February. Due to this, it was unable to take advantage of the slight recovery in the U.S. retail industry during the month. Retail sales rose marginally by 0.3% (excluding automotive sales) in February, driven by stronger consumer spending, which was its first rise in three months. 
Expect Better Results For March
While extreme weather conditions weighed heavily on Gap Inc’s February sales, we expect March results to be better. As the impact of the relentless weather was less intense in March, U.S. buyers gradually returned to their usual shopping ways. Since Gap Inc has a rich history of successful fashion launches, we expect it to have garnered significant customer attention during the month with its spring collection. Toward the latter part of February, the retailer launched its “Lived-In” campaign to promote its spring range of modern and youthful interpretation of classic, casual styles by leveraging emerging young artists including musicians, singers, actors and photographers. This campaign had a wide customer reach as it appeared in March issues of national magazines, outdoor in cultural hubs of key markets and across its social media channels. Gap Inc’s spring collection encompassed a large demographic including men, women, kids and babies with new washed pallets and fabrics along with iconic khakis, denim, tees, etc. 
The retailer offers its three main brands — Old Navy, Gap and Banana Republic — at different price points and crafts a separate shopping experiences around each of these brands. Although Gap Inc is a casual apparel retailer, it has created different markets for itself with each brand targeting distinct groups of buyers. This has worked well for the company so far and is likely to help it perform better during the month of March.Notes: