Gap Stock Up 30% YTD As Turnaround Efforts Reap Benefits

The Gap, Inc. (NYSE:GPS) looks good backed by its new growth strategy, solid focus on enhancing product quality and responsiveness to changing consumer trends. Also, the company has been making constant efforts to boost digital and mobile offerings, besides improving product acceptance. Though currency headwinds and its Banana Republic brand continue to play spoilsport, we believe these to be offset by initiatives undertaken.

In fact, Gap’s endeavors are well reflected in its share price movement. So far this year, the stock is up 30%, as against the industry’s decline of 13.8%. The company’s shares have also outpaced the broader Retail-Wholesale sector’s gain of 26.3%. Additionally, this Zacks Rank #3 (Hold) stock exhibits a VGM Score of B with a long-term earnings growth rate of 8%, highlighting its inherent potential.

Let’s Dive Deep

Growth Drivers

Gap’s new growth strategy looks quite appeasing. The company is now shifting focus to its two growth brands — Old Navy and Athleta. Over the next few years, it expects net sales of more than $10 billion and $1 billion, respectively, at each of the brands owing to U.S. store expansion and mobile and e-commerce growth.

Additionally, management plans to open 270 Old Navy and Athleta stores while closing 200 underperforming Gap and Banana Republic stores, simultaneously, over the next three years.

As consumers have been gradually shifting to online shopping, Gap is enhancing its e-commerce and omni-channel capabilities by adopting a number of initiatives. To this end, the company has increased its online presence across all of its brands. In fact, its online division is posting double-digit sales growth. Gap also 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 its omni-channel services. We believe these initiatives should boost Gap’s top line and overall performance.

Robust Surprise History & Upbeat Outlook

Gap delivered its third consecutive positive earnings surprise with fourth straight sales beat in third-quarter fiscal 2017. In addition, comparable store sales (comps) reflected strength for the fourth consecutive quarter amid a tough retail scenario. Though comps growth was backed by continued gains at Old Navy brand and growth at its namesake brand, it was partly offset by comps decline at Banana Republic.

Driven by its initiatives and a solid performance in the first three quarters of fiscal 2017, management raised full-year outlook. Gap now envisions adjusted earnings in the range of $2.08-$2.12 per share compared with $2.02-$2.10, projected earlier. Further, comps are anticipated to be up low-single-digits versus previous projection of flat to marginal improvement.

Consequently, the Zacks Consensus Estimate for fiscal 2017 has moved up by 4 cents to $2.10 in the last seven days.

Concerns/Weaknesses

Gap’s significant international presence exposes the company to adverse currency fluctuations. Though its earnings and sales topped estimates in third-quarter fiscal 2017, currency headwinds caused earnings to decline year over year. Evidently, the bottom line fell 3.3% in the quarter compared with the year-ago period. In the fiscal second quarter, earnings and revenues were down on a year-over-year basis.

Also, the company has been witnessing persistent softness across Banana Republic for a while now. Evidently, its comps declined 4%, 5% and 1% in the first, second and third quarters, respectively.

Gap Vs Industry

Looking for Solid Picks, Check These

Some better-ranked stocks in the same industry include Urban Outfitters, Inc. (NASDAQ:URBN) , The Buckle, Inc. (NYSE:BKE) and Zumiez Inc. (NASDAQ:ZUMZ) .

Urban Outfitters, with a long-term earnings growth rate of 11.5% has pulled off an average positive earnings surprise of 5.7% in the last four quarters. It also sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Buckle, with a Zacks Rank #1 has delivered an average positive earnings surprise of 3.8% in the last four quarters.

Zumiez, with a long-term earnings growth rate of 18% carries a Zacks Rank #2 (Buy). Also, its earnings have outpaced the Zacks Consensus Estimate in each of the trailing four quarters by an average of 27.1%.

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