Will Gap's (GPS) Strategic Actions Continue To Aid Growth?

The Gap, Inc. (NYSE:GPS) has been in investors’ good books due to its new growth strategy, solid focus on enhancing product quality and responsiveness to changing consumer trends. Further, the company has been making constant efforts to boost digital and mobile offerings, alongside improving product acceptance. This apart, the company’s long-term earnings growth rate of 8% highlights its inherent strength.

Solid Surprise History and Outlook Reflect Focus on Growth Plans

The success of Gap’s aforementioned endeavors is clearly visible from the company’s surprise history and upbeat outlook for fiscal 2017. Evidently, Gap’s second-quarter fiscal 2017 marked its second successive earnings beat, while sales delivered its fifth consecutive quarter of positive surprise. Also, comps grew year over year for the third straight quarter, primarily driven by continued strength at the Old Navy brand, which was fueled by improved traffic. Though Gap’s namesake brand witnessed a year-over-year drop in comps, results grew sequentially backed by better product quality.

Clearly, Gap’s growth initiatives are paying off, which along with a solid first half encouraged management to raise earnings per share guidance for fiscal 2017. It now envisions adjusted earnings in the range of $2.02-$2.10 per share compared with the previous range of $1.95-$2.05.

Focus on Athleta and Old Navy — New Growth Strategy

As part of its new growth strategy, Gap now focused on its two growth brands — Old Navy and Athleta. The company expects net sales of more than $10 billion and $1 billion, respectively, at each of the brands over the next few years, with these gains stemming from U.S. store expansion along with 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.

The company anticipates these new strategies will create about $500 million in expense savings over the next three years, and the company added that it plans to reinvest a portion of those savings in its growth goals.

Other Growth Endeavors on Track

In addition to the new growth strategy, Gap continues with other strategic initiatives in order to keep track with the evolving apparel industry and competitors like Abercrombie & Fitch Co. (NYSE:ANF) , Zumiez Inc. (NASDAQ:ZUMZ) and American Eagle Outfitters Inc. (NYSE:AEO) .

In this regard, the company has accelerated the pact of its transformation plan by bringing meaningful changes to its product portfolio and operating capabilities worldwide. Further, management remains keen on streamlining operating model by creating a more proficient global brand structure, which will enable its brands to utilize scale advantages more efficiently.

Further, the company is enhancing e-Commerce and omni-channel capabilities by adopting a number of initiatives. Notably, the company has increased online presence across all of its brands, and its online division is one of its most profitable, posting double-digit sales growth. Recently, the company announced plans to launch the buy online, pick-up in store service, a new personalization engine that is powered by customer data, and continued significant investment in omni-channel services. As part of its omni-channel endeavors, Gap previously extended the “find-in-store”, “Reserve-in-Store” and “Order in Store” capabilities across various stores.

We believe that all these initiatives, combined with constant digital investments should boost Gap’s top-line in the long run.

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