It’s great when a brick-and-mortar retailer finds success online or by launching a new nameplate, but as the turnaround at Gap (NYSE:GPS) shows, when it comes to apparel, there’s no substitute for having fashions customers want.
The long-suffering operator of Gap, Banana Republic and Old Navy appears to be that rarest of corporate success stories: A turnaround that’s actually turning around. Gap stock has nearly doubled for the year-to-date after languishing for the better part of a decade.
Having fashions that customers clamor for means more full-priced selling, which is a boon to margins. After all, nothing clobbers profitability quite like panicky discounts and sales intended to flush rapidly aging inventory out of bloated stores and warehouses.
So it’s a welcome relief that fresh talent in the design and marketing departments are luring customers back to Gap’s offerings across its brands.
The company posted a 29% jump in profit in its most recent quarter, easily topping Wall Street’s forecast. Even better, Gap lifted its earnings outlook for the full year to $1.95 to $2 per share — up from the $1.78 to $1.83 guidance issued in May — and analysts think even that’s too conservative. Wall Street’s average forecast stands at $2.11 a share for the current fiscal year.
Yes, Gap’s online sales are boosting results and its Athleta stores are doing a credible job of jumping on the Lululemon (NASDAQ:LULU) yoga craze — but that’s not what’s driving the turnaround.
Online revenue jumped 24% in the latest quarter, but still only accounted for about 10% of total sales.
And although it’s pushing out its Athleta concept at a furious clip — doubling its store base in the second quarter — Gap still has only 22 locations for the brand. That’s a drop in the bucket, considering the more than 3,000 company-owned Gap, Banana Republic and Old Navy stores sprinkled across the globe.
Nope, the growth is coming from its good old brick-and-mortar store base, especially in the U.S. For the most recent quarter, sales rose 5.6% to $3.58 billion, helped by Gap and Banana Republic stores in North America.
It turns out that having the right fashions in appealing stores does wonders for demand.
“Customers responded well to our product offerings across our brands,” CEO Glenn Murphy said in the most recent quarterly earnings release. “Our continued focus on product and store execution are helping to drive positive momentum and we’re committed to sustaining solid performance for the remainder of the year.”
Gap’s resurgence on the fashion front has lit a fire under its stock. Except for a few short-lived periods, shares have been stuck between $15 and the low $20s for a decade. Now it’s up to $36 and change — a level it hasn’t seen on a nominal basis since 2000.
But after rallying 95% for the year-to-date, is Gap still a buy? It sure doesn’t look cheap. By both trailing and forward earnings, GPS trades at premiums of 66% and 25%, respectively, to its own five-year averages, according to Thomson Reuters Stock Reports.
Of course Gap’s business hasn’t been this good in five years. Or a decade, for that matter.
Wall Street’s expectations for Gap are very high. If the company can keep beating them, the stock has more upside ahead.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
