Can Gap's Initiatives Aid Soft Flagship Brand & Drive Stock?

Robust omni-channel efforts, solid growth strategy, efficient capital-allocation plan and impressive surprise history are the key strengths for The Gap, Inc. GPS. Notably, the company’s earnings have outpaced estimates in five of the trailing six quarters, with the seventh consecutive sales beat in second-quarter fiscal 2018.

However, persistent softness seen in the flagship brand, over the last few quarters, has been a hindrance for stock growth. Year to date, the stock has lost 15.1% against the industry’s growth of 3%.

 

Persistent softness in the Gap brand, mainly owing to operational headwinds and assortment issues, is weighing on investors’ sentiments.  Apparently, comps fell 5% at the Gap brand in the fiscal second quarter. In addition, it hurt gross margin in the reported quarter.

So, let’s see whether this Zacks Rank #3 (Hold) company’s strategies can fix the issues across the Gap brand.

Strategies Aiding Growth

Measures to Revive Gap Brand

Management remains focused to revive the Gap brand by optimizing the organizational structure of the brand. Also, it is working on reducing in-store waste and inefficiency beside focusing on the brand’s operational discipline.

Gap remains encouraged to witness sequential merchandise margin improvement at the brand in the second half of fiscal 2018, as the company progresses well with addressing the inventory issues. This shows that it remains focused on stabilizing the business and returning the brand to its growth trajectory.

Other Strategies

Gap’s consistent focus on enhancing product quality and responsiveness to changing consumer trends bode well. Management remains keen on making constant efforts to bolster digital and mobile offerings beside improving product acceptance. In fact, it is adopting a host of initiatives to enhance its omni-channel capabilities, including e-commerce presence. Notably, the company has increased its online presence across all of its brands, which is likely to generate higher sales and boost profitability.

Recently, the Old Navy brand rolled out Buy Online Pick up in Store capability across the nation, which received a positive response evident from additional purchases. Further, it remains on track to launch a personalization engine, powered by customer data, and continued significant investment in its omni-channel services. Further, Gap extended the “find-in-store”, “Reserve-in-Store” and “Order in Store” capabilities across various stores.

Meanwhile, the company remains focused on its two brands — Old Navy and Athleta, as part of its growth strategy. It expects net sales of more than $10 billion and $1 billion, respectively, at each of the brands in the coming years. It expects to witness these gains as a result of U.S. store expansion, and mobile and e-commerce growth. Additionally, the company plans to open 270 Old Navy and Athleta stores, while simultaneously closing 200 underperforming Gap and Banana Republic stores over the next three years.

Management expects these strategies to create about $500 million in expense savings. It also plans to reinvest a portion of those savings in its growth goals. In fiscal 2018, the company’s plan to open about 25 stores is likely to comprise more of Athleta and Old Navy stores while it intends to close Gap and Banana Republic stores.

Gap’s moves to enhance shareholder value via consistent dividend hikes and share buybacks are commendable. In second-quarter fiscal 2018, it bought back 3.2 million shares for approximately $100 million and paid dividends of 24.25 cents per share. The dividend reflects growth of more than 5% year over year. It also announced a fiscal third-quarter dividend of 24.25 cents per share, payable on or after Oct 31, 2018. Notably, management continues anticipating share buybacks worth approximately $100 million per quarter through fiscal 2018.

Key Takeaways From 2Q18

Apart from exceeding earnings and sales estimates in second-quarter fiscal 2018, results improved year over year. Currency tailwinds are also driving the quarterly performance. Continued momentum at Old Navy, boosted by higher traffic, has been significantly contributing to the company’s comparable-store sales (comps), which improved for the seventh straight quarter in the fiscal second quarter. Also, the company is witnessing strength across Athleta and progressing well on Banana Republic's turnaround. Impressively, Banana Republic posted the third straight quarter of positive comps.

Management reaffirmed guidance for fiscal 2018. Comps are anticipated to be flat to up slightly. Earnings per share are envisioned to be $2.55-$2.70.

Bottom Line

Though management is taking measures to revive its Gap brand, it remains to be seen whether these efforts, along with other growth strategies, will reflect in the company’s share price.

Meanwhile, investors may count on some better-ranked stocks in the same industry, enlisted below:

Urban Outfitters, Inc. URBN has pulled off an average positive earnings surprise of 17.7% in the last four quarters and it currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boot Barn Holdings, Inc. BOOT, also a Zacks Rank #1 stock, has an impressive long-term earnings growth rate of 23%.

Zumiez Inc. ZUMZ delivered an average positive earnings surprise of 9.6% in the trailing four quarters and it presently has a Zacks Rank #1.

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