Gap's (GPS) Growth Strategies Drive Stock: What Lies Ahead?

The Gap Inc. (NYSE:GPS) is in investors’ good books owing to its robust stock performance, solid surprise trend, strategic efforts to uplift its responsiveness to changing consumer trends and product quality, enhancement of e-commerce and omni-channel capabilities, and new growth strategy. However, currency headwinds continue to hurt company’s earnings.

Shares of Gap gained 45.7% in the past six months compared with the industry’s growth of 18.3%. Let’s analyze the pros and cons of this Zacks Rank #3 (Hold) company.

Strong Surprise History

Gap displays a solid surprise trend in the recent quarters. The company delivered third-consecutive earnings beat in third-quarter fiscal 2017. Also, it was the company’s fourth consecutive quarter of positive sales surprise. Additionally, its comparable store sales (comps) reflected strength for the fourth straight quarter, which can be attributed to the continuous growth at its Old Navy Brand fueled by improved traffic. Clearly, the growth initiatives are paying off well.

This along with the company’s solid performance in the nine months of fiscal 2017 encouraged management to raise outlook for the fiscal 2017. Gap envisions adjusted earnings for the fiscal year 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.

Enhancing Online Presence

Gap has undertaken several actions in order to cope up with the changing consumer trends. Its robust e-commerce and omni-channel endeavors are driving its online presence across all of its brands. In fact, online is now among its most profitable divisions, posting double-digit sales growth.

Recently, Gap announced plans to launch the buy online, pick-up in store service, a new personalization engine that is powered by customer data. Moreover, it has extended the find-in-store, Reserve-in-Store and Order in Store capabilities across various stores. These efforts have also been helping store associates enrich customer experiences, thus highlighting the company’s focus on augmenting omni-channel and digital operations. We expect these initiatives, combined with constant digital investments to boost Gap’s top line in the long run.

Focus on Growth Brands Bodes Well

Gap has narrowed down its focus on its growth brands namely Old Navy and Athleta as a part of its new growth strategy. In fact, the company plans to open 270 Old Navy and Athleta stores and expects net sales of more than $10 billion and $1 billion, respectively, at each of these brands over the next few years. These gains will come as a result of U.S. store expansion and mobile and e-commerce growth. Simultaneously, it is on schedule to close 200 underperforming Gap and Banana Republic stores over the next three years.

Gap expects that these new strategies will create about $500 million in expense savings over the next three years. In addition, it plans to reinvest a portion of those savings toward growth in the near term.

Bottom Line

The company’s growth strategies and omni-channel capabilities clearly reveal its long-term potential. However, currency headwinds have been taking a toll on Gap’s performance by hurting its top and bottom lines. Also, the company’s Banana Republic brand continues to be a spoilsport.

Do Retail-Apparel Stocks Grab Your Attention? Check These

Investors interested may consider American Eagle Outfitters Inc. (NYSE:AEO) , Urban Outfitters Inc. (NASDAQ:URBN) and Zumiez Inc. (NASDAQ:ZUMZ) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

American Eagle delivered an average positive earnings surprise of 2.3% in the trailing four quarters. It has a long-term earnings growth rate of 7.5%.

Urban Outfitters pulled off an average positive earnings surprise of 5.6% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 12%.

Zumiez delivered an average positive earnings surprise of 22.2% in the trailing four quarters. It has a long-term earnings growth rate of 18%.

Zacks Editor-in-Chief Goes ""All In"" on This Stock

Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.

Download it free >>