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Gap Banks on Strategic Initiatives Despite Retail Headwinds


The Gap, Inc. GPS looks good on the back of its robust initiatives, widening global footprint as well as enhancing eCommerce and omni-channel capabilities. Despite a tough retail landscape, Gap is gaining from its strategic growth endeavors and turnaround efforts.

This Zacks Rank #3 (Hold) company’s stock has gained 0.9% on a year-to-date basis against the Zacks categorized Retail – Apparel/Shoe industry’s decline of 23.5%. Notably, the stock boasts a VGM Score of “A,” with a long-term earnings growth rate of 8%, which highlights its inherent potential.

Growth Strategies

Gap’s strategic plans help keep a track of the accelerated pace of change in the apparel industry, which enables it to move accordingly. Also, management intends to speed up its transformation plan by bringing meaningful changes to its product portfolio and operating capabilities worldwide. In this regard, the company plans to focus on growing Gap’s brands in the regions that offer greater structural advantage and potential to expand market share, while closing the underperforming stores.

Moreover, Gap’s efforts to streamline its operating model by creating a more proficient global brand structure, enables its brands to utilize scale advantages more efficiently. While these actions are likely to attract annualized sales loss and restructuring charges, they are anticipated to deliver annualized pre-tax savings of $275 million and operating margin growth of about two percentage points.

This positions the company well for long-term growth by setting its priorities right and channelizing the resources accordingly. Alongside, Gap remains committed to extend its global reach, along with strategically reducing the Gap brand’s exposure in North America that is witnessing sluggish growth and high competition.

With the brick-and-mortar retailing concept losing luster over the last few years in the U.S., Gap remains focused on enhancement of its eCommerce and omni-channel capabilities. In fact, as part of its omni-channel endeavors, the company has been continuously extending its “find-in-store,” “Reserve-in-Store” and “Order in Store” facilities across various stores.

Also, Gap recently came up with an app, DressingRoom, which will enable customers to try clothes through reality experiences generated via smart phones. We are impressed by its efforts to attract the traffic at its stores, and believe these to drive its top line, going ahead.

In fact, these initiatives helped Gap to post an earnings beat in the first quarter of fiscal 2017, after in-line earnings in the last two quarters. Also, its earnings have outpaced the Zacks Consensus Estimate by an average of 6.5% in the trailing four quarters. Furthermore, its sales have outperformed the consensus mark for four straight quarters, including the first quarter. Notably, the company is gaining well from its Old Navy brand.


However, currency headwinds remain a major concern for the company that evidently dented first-quarter fiscal 2017 results. Going forward, management forecasts adverse currency fluctuations to persist in fiscal 2017 as well. Also, Gap is witnessing persistent weakness across its Banana Republic brand. Furthermore, stiff competition from other major players remains a threat as it can hurt the company’s market share and overall operating performance in the near term.

Bottom Line

We believe Gap to efficiently overcome these aforementioned headwinds on the back of its robust growth efforts, and to drive the stock’s momentum further in the coming days.

Meanwhile, you can count on some hot stocks in the Retail space that include The Children's Place, Inc. PLCE, J.Jill, Inc. JILL and Tilly's, Inc. TLYS sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Children's Place, with a long-term earnings growth rate of 8% has delivered an average positive earnings surprise of 36.6% in the last four quarters.

J.Jill, with a long-term earnings growth rate of 19.8% has delivered a positive earnings surprise of 33.3% in the last reported quarter.

Tilly's, with a long-term earnings growth rate of 13% has pulled off an average positive earnings surprise of 120.4% in the last four quarters.

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