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Can Gap's Brand Revival & Spin-Off Plans Solve Its Problems?

Zacks Equity Research

The Gap, Inc. GPS is making several efforts to revive performance across its flagship brand, which remains sluggish for quite a while now. We note that the brand has been witnessing operational headwinds across its business and assortment issues, which are denting its performance. This has also been hurting the company’s comparable sales (comps) and top-line performance.

In fourth-quarter fiscal 2018, comps for the Gap brand fell 5% against flat comps in the year-ago quarter. Also, the company’s total comps inched down 1%, following flat comps in the fiscal third quarter. Prior to this, comps improved for the seventh straight quarter in second-quarter fiscal 2018. In addition, the company’s top line lagged the Zacks Consensus Estimate in the most recent quarter, after surpassing the same in the previous eight quarters.

Apart from these concerns, a drab earnings view for fiscal 2019 has further hurt investors’ sentiments. Despite impressive bottom-line results in the fiscal fourth quarter, Gap’s earnings outlook fell shy of analysts’ expectations. Earnings are envisioned to be $2.40-$2.55, excluding the anticipated costs associated with the restructuring of the Gap brand. This projection is lower than $2.59 earned last fiscal. The Zacks Consensus Estimate for the fiscal year is currently pegged at $2.49.


 

Consequently, shares of this leading clothing retailer company have lost 19.1% in a year, wider than the industry’s decline of 15.6%.

Gap’s Brand Revitalization & Spin-Off Plans

On its fourth-quarter conference call, management announced plans to revitalize the Gap brand by streamlining its specialty fleet and renewing the marketing model to enhance customer engagement and loyalty. In relation to streamlining specialty fleet, it expects to shut down roughly 230 stores in the next two years. This, in turn, will result in sales decline of nearly $625 million annually. Moreover, management estimates pre-tax costs of $250-$300 million. Also, these restructuring measures are likely to generate annualized pre-tax savings of nearly $90 million. These actions will lead to about 40% of sales from online, while 60% will come from the specialty and value channels.

Additionally, Gap unveiled plans to spin off into two independent public companies, Old Navy and yet-to-be-named company (NewCo). The NewCo, with roughly $9 billion revenues annually, will house the Gap, Athleta, Banana Republic, Intermix and Hill City brands. Moreover, the company expects Old Navy, which is among the fast-growing apparel brands with about $8 billion revenues in a year, to enhance its omni-channel capabilities and product offerings for enhancing customer experience and gaining market share.

Management expects the spin off, which is anticipated to close in 2020, to enable the two stand-alone companies to strategically focus on their growth initiatives and operating structure. Additionally, the company has made significant progress with respect to its balanced growth strategy by enhancing omni-channel and digital capabilities as well as increasing operational efficiencies. Management expects the two companies to embed this balanced growth strategy and cater well to the challenging retail space.

Wrapping Up

While the afore-mentioned initiatives look promising, the company's success depends on when its flagship brand and stock returns to growth. Notably, the stock might take some time to be back on the growth trajectory and get a boost from Gap’s impressive earnings surprise history and digital strength.

Impressively, the company has outpaced the earnings estimates in seven of the trailing eight quarters. Furthermore, Gap’s online channel witnessed another solid year, surpassing its target by delivering more than $3.6 billion in sales during fiscal 2018. This represented a mid-teens growth rate compared with the previous year.

Currently, Gap carries a Zacks Rank #3 (Hold).

3 Better-Ranked Retail Stocks You May Count on

Abercrombie & Fitch Co. ANF has delivered average positive earnings surprise of 88.3% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Canada Goose Holdings Inc. GOOS delivered average positive earnings surprise of 82.7% in the trailing four quarters. The company currently carries a Zacks Rank #2 (Buy).

Stitch Fix, Inc. SFIX, also a Zacks Rank #2 stock, has an impressive long-term earnings growth rate of 22.5%.

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