In a world where former retail industry leaders are sliding toward bankruptcy, I’m looking at you Sears Holdings Corp (NASDAQ:SHLD) Gap Inc (NYSE:GPS) seems to have a plan forward. GPS stock has had its ups and downs this year, but ultimately the share price has risen more than 30% so far.
Unlike many of its peers that have little to show for their so-called turnaround plans, Gap’s financials have been on the mend and investors are starting to take notice.
Last week Gap released better-than-expected third quarter results. Net sales were up 1.1% and, more important, same-store sales rose 3% compared to the 1% decline the company reported in the year-ago quarter. Gross profit was also on the up-and-up with the gross margin rising 40 basis points to 39.7%.
Management has been focused on “balanced growth” and that strategy appears to be working. Operating income declined, but largely because of investments the firm has made in marketing and its digital initiatives. Gap has been improving its online presence and adding features like in-store pickup in order to draw in new customers.
The Right Focus
Aside from investments in its digital initiatives, a big part of the reason that Gap is faring better than some of its peers is that the company has focused on the brands that are working.
Discount clothing and athletic apparel have emerged as consumer favorites and in response Gap has focused its efforts on its Old Navy brand as well as its fitness-centered Athleta stores.
This strategy is working for Gap because Old Navy is the firm’s largest revenue generator. Success with that brand translates to success for the company overall and a little more room to work on building Athleta and improving its namesake brand and it’s more expensive sister brand, Banana Republic.
Same-store sales at Old Navy rose 4%, beating expectations and proving that efforts to improve inventory turnover in-store are paying off.
These initiatives have set Gap up for another strong quarter to finish out the year. Management raised its expectations for the year, providing full-year guidance for EPS between $2.08 and $2.12, compared to the $2.01-$2.10 that was initially issued.
Management Is Shareholder Friendly
Another reason investors might want to consider GPS stock is management’s track record of rewarding shareholders. Right now, the firm pays a 3.07% dividend yield. Unlike many of it’s peers, Gap is likely to continue paying out that dividend, and possibly increasing it as conditions improve.
GPS also returns some of its cash to shareholders through buybacks. The firm repurchased 3.8 million shares in the third quarter and is planning to spend $100 million on buybacks in the coming quarter.
An important part of choosing stocks is looking into a company’s management and deciding whether or not you can trust them. For me, Gap ticks the boxes of a well-managed company. GPS has responded well to the retail apocalypse and its turnaround plans appear to be taking shape and righting the ship.
Management remained dedicated to increasing shareholder value even during tough times and I think once the company is on more solid footing GPS stock owners will continue to be rewarded.
The Bottom Line
All in all, GPS stock is not a bad pick in the retail space. However, with the share price approaching its 52-week high, investors might want to wait on the sidelines for another pullback before taking a position. The thing about GPS stock is that it’s still a retail play- and that makes it risky and volatile.
Fickle consumers, geopolitical tension and economic events all play a huge role in Gap’s success story and unfortunately the majority of those factors are outside of management’s control. However, if you’re already a GPS shareholder I’d hang on, it’s worth it to ride out the turbulence and you’re almost certain to be rewarded.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.