Gap on Recovery Path

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Gap Inc. (:GAP) witnessed considerable recovery in its comparable sales and total sales performance driven by its relentless endeavors to keep itself on the growth trajectory. The company’s efforts have paid off well in an economy, which is looking for ways to shield itself from a financial turmoil that seems to have no end.

During the period from February to May, the company registered comparable sales growth in each month except April. During that period, comps growth touched a low of negative 2% and hit a high of 8%, thereby recording average growth of approximately 3%. In the first four months of fiscal 2012, comps increased 4% in February, 8% in March and 2% in May while it declined 2% in April.

Monthly sales data for Gap also portrays a decent performance. Within February to May 2012, the company registered a minimum year-over-year flat sales growth and a maximum growth of 10%, reflecting an average growth of approximately 5% for the period. The company registered sales growth of 6% in February, 10% in March, flat in April and 4% in May.

Fiscal 2011 Sales: A Recap

In fiscal 2011, Gap reported a decline in comparable sales every month, except April and June. Lackluster sales in the North American region have continuously dragged down Gap’s comparable store sales throughout fiscal 2011. During the fiscal, the company reported a decline of 4% in comparable sales compared with an increase of 2% during the same period in fiscal 2010. Accordingly, Gap’s net sales inched down 1% to $14.55 billion from the prior-year sales of $14.66 billion.

Initiatives Taken to Rebound Top Line

In an effort to improve customer experience and enhance productivity per square footage, the company plans to strategically close and consolidate square footage at Gap and Old Navy brands. Gap intends to strategically reduce its Gap North America store counts to 950 by the end of fiscal 2013, including 700 specialty stores and approximately 250 outlets.

Contrary to this, the company is planning aggressively to expand its international and franchise business. Moreover, the company intends to triple the Gap store count in China from 15 to approximately 45 during current fiscal.

In a drive to boost its international operations, Gap also consolidated its foreign business under one division in London. Lackluster sales in North America compelled the company to explore the overseas market. In order to counter the domestic market saturation, Gap is aiming to generate 30% of total sales from overseas operations and online business by 2013. To achieve this, Gap has opened stores in China, Italy and Australia, and has launched the e-commerce business in more than 90 markets. These moves are expected to further strengthen its top and bottom lines, moving forward.

Results so far

Despite a consistent weak performance in all four quarters of fiscal 2011, the company reported a strong first-quarter 2012 result with net sales increasing 5.8%. The robust performance was primarily driven by a 4% growth in comparable store sales. As a result of the increased top line, the company’s earnings climbed 17.5% year over year to 40 cents per share.

Conclusion

We believe that the company’s long-term strategic moves along with disciplined cost management measures will not only provide financial flexibility, but will also help to drive value proposition. Moreover, Gap’s globally recognized brands complement one another, enabling it to leverage its position in the sector.

Gap which competes with American Eagle Outfitters Inc. (AEO) and The TJX Companies Inc. (TJX) currently holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. Our long-term recommendation on the stock remains ‘Neutral’.

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