Gap, Inc. (GPS) is banking on a change in management to turn around the fortunes of Gap stock and placate investors after it signaled that its full-year profits will be a disappointment.
GPS, a global retail apparel company that provides clothing, accessories, and personal care products for men, women and children, promoted 48-year-old Jeff Kirwan to become the Gap brand’s new global president. He succeeds current CEO Stephen Sunnucks, who departs the company on Dec. 19. Kirwan was previously the president of the Gap’s Greater China unit.
In addition, Andi Owen, the 49-year old head of Gap’s outlet division, will become the global president of the company’s Banana Republic division on Jan. 5, succeeding Jack Calhoun, who leave on Feb. 1.
The management changes were orchestrated by Art Peck, GPS president, who will become chief executive officer and chairman of the board in February, succeeding Glenn Murphy.
The moves come on the heels of a string of weak results for Gap stock. Gap reported same-store sales declines of 5% for the third quarter ended Nov. 1 and a drop in its full year earnings estimate from $2.95-$3 to $2.73-$2.78. Company profits for the third quarter rose from $337 million to $351 million, but the margin declined from 14.5% to 13.9%.
Besides the iconic Gap brand and Banana Republic, the company also operates Old Navy, Athleta, Piperlime, and Intermix stores and brands. Gap operates via multiple channels that include owned physical locations, online and franchising.
Peck said he is already feeling the pressure to succeed. “I have a high degree of urgency about the situation at GAP,” he said on a conference call to announce Q3 earnings, and said he is putting in place changes that he hopes will make 2015 a better year.
So how will the changes impact Gap stock?
Gap, Inc. Diversifies With Zalando Deal
Earlier this week, Gap announced a new partnership with Zalando, Europe’s largest online fashion retailer. Starting in the summer of 2015, Gap will open a dedicated online store within Zalando offering a broad assortment of its fashion and accessories. The deal does not yet include Gap Inc.’s other brands.
Even though Gap has more than 3,500 stores worldwide, it only has about 200 stores in Europe and serves 24 European countries from its websites. It sill lacks a presence in major markets, such as Germany. The Zalando deal allows Gap Inc. access to many more customers in Europe and will allow GPS to more easily identify market interest in which to target new store openings.
Gap’s biggest competitors in Europe are Inditex SA and H & M Hennes & Mauritz AB, both of which have chosen to invest in the growth of their own e-commerce sites and are not listed on Zalando.
Is Gap, Inc. a Good Value?
GAP’s current price-to-earnings (P/E) ratio of 14.2 compared to the industry average of 23.4 makes it appear cheap, but after gaining momentum earlier in the year Gap stock dropped like a rock in October and has been crawling its way back up since to just over break-even for the year.
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The consensus stock price target is $44 a share, about a 10-11% premium to its current trading range. Due to the Gap Inc.’s recent disappointing earnings announcements, analyst sentiment has moved markedly lower with analysts downgrading Gap stock over the past few months. A 1.22 price-to-earnings-growth rate signals a neutral valuation.
The good news is the dividend, which is yielding a nice 2.2% which is really good for a retailer, and has a 30% payout ratio.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
