Is The Worst Over For Gap Inc.?

Gap Inc. (NYSE:GPS) reported its December sales on January 5, with a growth in comparable sales of 4%, compared with a negative 5% in the same period last year. For the combined November and December holiday months, the net sales increased 1%, while the comps were up 2%. This sent the stock price of the company soaring 10% in after-hours trading. The improved momentum has been spurred by a positive customer response at Gap and Old Navy. A strong finish to a very competitive holiday season prompted the company to expect its full year adjusted earnings per share to be modestly above the high end of their previous guidance of $1.92.

See our complete analysis for Gap Inc.

Gap’s results are in sharp contrast to those posted by department store operators and other apparel retailers. Department store chains such as Macy’s and Kohl’s both dropped their profit projections last week, after a holiday period which was worse than expected. Furthermore, American Eagle, a retailer that performed well in 2016, also said its fourth quarter comparable sales to date have been flat, since “the holiday season was choppy and highly promotional.”

Gap has benefited from a strong demand for its Old Navy and Gap brands. At Old Navy, the positive comps and merchandise margin gains were a result of improved average unit revenue and conversion. This encouraging momentum also bodes well for the brand ahead of the spring season. The core Gap brand is also showing signs of improvement, but there is still more work to be done. However, the company was also a victim of poor traffic trends, in line with the industry, of a negative 10%, with margin gains to be partially offset by higher average unit costs, undertaken to improve the product quality.

After a positive showing in November, when the brand’s comps increased 5%, Banana Republic again stumbled. The brand can be identified as the weak link for the company. Lackluster product assortment is pushing customers away from the brand, and the consumers are unwilling to pay the premium prices it once commanded. Consequently, it is falling into the same trap as Gap, by resorting to discounting and deals to get rid of the built up inventory. A study by RBC Capital indicates that reversing the situation Banana Republic finds itself in will not be easy. In the survey it was found that 48% of millennials disliked the brand, as compared to just 22% who said they liked it. The brand didn’t do that well with non-millennials either; 53% of non-millennials surveyed disliked the brand, as opposed to 18% that viewed it favorably. The older, non-millennial audience was more likely to shop at traditional retailers, such as Kohl’s, J.C. Penney, Macy’s, T.J. Maxx, Ross Stores, and Burlington. The survey goes on to show that 75% of respondents never shop at Banana Republic.

While it remains to be seen if the positive momentum will carry forward in 2017, the signs currently do point at a turnaround in the fortunes for Gap.

Have more questions about Gap Inc? See the links below:

• Will Gap Inc.’s Problems Carry On In 2017?
• Distribution Center Fire And Old Navy Drag Down Sales In November For Gap Inc.
• Gap’s Sales Slump Continues In The Third Quarter
• Distribution Center Fire To Play A Dampener On Gap Inc.’s Earnings
• Gap Inc.’s Stock Rises Despite A Fall In October Sales
• How Gap Inc. Is Cashing In On The Athleisure Trend
• Banana Republic To Shutter Its UK Stores Amid A Sales Slump
• Gap Inc. Shares Soar Despite A Fall In Sales
• How Is Gap Expected To Perform In 2016?
• Gap Reports Yet Another Month Of Declining Comparable Sales
• Can Old Navy Win The Back-To-School Market?
• What Are The Problems Plaguing Gap Inc.?
• Gap Reports A Weak Outlook For FY 2016
• Fall In Sales To Weigh On Gap In The Second Quarter
• After Positive Results In June, Gap Returns To A Sales Decline
• Are There Signs Of A Turnaround At Gap, Or Is It Just A Blip On The Radar?
• Are Gap Inc’s Earnings Volatile?
• What’s Gap Inc’s Revenue & Net Income Breakdown In Terms Of Different Brands?
• By How Much Did Gap Inc’s Revenue & EBITDA Grow In The Last Five Years?
• What Is Gap Inc’s Fundamental Value Based On Expected 2016 Results?
• By What Percentage Can Gap Inc’s Revenues Grow Over The Next Three Years?
• How Are Gap Inc’s Old Navy Revenues & Earnings Expected To Grow Over The Next Five Years?
• How Are Gap Inc’s Banana Republic Revenues & Earnings Expected To Grow Over The Next Five Years?
• How Much Revenues Can Gap Inc’s Athleta Brand Add By 2020?

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