Gap Inc’s January Sales Fall, But It Raises Full Year Guidance

by Trefis Team
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Gap Inc (NYSE:GPS) recently reported  January sales results that were somewhat surprising, considering its decent performance during the holiday season. The company reported 3% decline in its comparable sales, while analysts had estimated a fall of 1% in the metric. The primary reason behind the retailer’s dismal performance during January was the continued slump in its namesake brand. Comparable sales for Gap stumbled by 9% as buyers remained uncertain about Gap Inc’s relatively expensive brands. However, this fall was somewhat counterbalanced by 2% growth at Banana Republic and 3% rise in comparable sales at Old Navy, which has been the company’s most successful brand lately. Comparable sales growth at Banana Republic may look surprising considering that buyers haven’t spent much on Gap Inc’s premium brands over the past several quarters.  But it must be noted that the brand had a very favorable comparable period (10% decline in January 2014). Hence, positive comparable sales growth on top of 10% decline in the year ago period doesn’t really reflect improved performance. [1]

Our price estimate for Gap Inc is at $50.51, implying a premium of over 20% to the market price.

See our complete analysis for Gap Inc.

While January was disappointing, Gap Inc guided its fourth quarter earnings ahead of the consensus estimate and also raised its full year guidance. (Fiscal years end with January.) The company expects to report Q4 earnings per share at $0.73-$0.74, while the street estimate for the figure stands at $0.68. For the full year 2014, Gap Inc raised its guidance to $2.86-$2.87 from its earlier outlook of $2.73-$2.78. The retailer’s new EPS guidance was ahead of the consensus estimate of $2.74. Gap Inc cited strong growth at Old Navy and lower tax rate as the primary reasons for its guidance revision. The company expects its tax rate for the year to be around 37.3%, marginally down from last year’s level of 38.0%.

Gap Inc’s affordable casual brand, Old Navy, performed very well throughout last year amid an edgy retail environment, where U.S. buyers were consistently looking for value-for-money products. For the fourth quarter, the company reported an exceptional 11% growth in comparable sales at Old Navy, while it reported 6% decline at Gap and just 1% rise at Banana Republic. Although Old Navy’s growth was very slow in Q3 (+1%), it had recorded 4% growth in comparable sales in the prior quarter. The brand’s attractive price points, its expansive product variety and vast presence in the market helped it perform better than Gap and Banana Republic, and counterparts such as American Eagle Outfitters (NYSE:AEO) and Aeropostale (NYSE:ARO).

While Aeropostale and American Eagle have lost customers due to their persistent focus on basic products and certain merchandise goof ups, Old Navy has maintained a portfolio that is more than just basic apparel. The brand regularly shuffles between various categories (such as women’s dresses, jeans for the entire family, swim suits, flip flops, etc.) and thus covers a wider customer base while maintaining interest in the merchandise. Moreover, Old Navy’s product launches have mostly been inline with changing trends and seasons, which has enabled it to serve its customers better.

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Notes:
  1. Gap Inc. Reports January And Fourth Quarter Results, Gap Inc, Feb 9 2015 []
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