Gap Inc's (GPS) second-quarter fiscal 2014 results marked the company’s comeback with higher sales, cost containment endeavors, strong earnings growth and improved shareholder return. Top- and bottom line results also gained from the company’s strategic initiatives focused on enhancing omni-channel capabilities, global growth and effective inventory management.
The company’s quarterly adjusted earnings came in at $0.70 per share, up 9.4% from the year-ago comparable quarter earnings of $0.64 and a penny ahead of the Zacks Consensus Estimate of $0.69 per share. However, the company highlighted that foreign currency fluctuations reduced its earnings per share growth for the quarter by 4 percentage points.
Net sales rose 3% to $3,981 million and were marginally ahead the Zacks Consensus Estimate of $3,979 million. With persistent focus on developing its omni-channel network, Gap’s quarterly online sales came in at $515 million, up 11% from the prior-year quarter. During the quarter, Gap’s comparable-store sales (comps) were flat as against a 5% rise registered in the year-ago quarter.
However, we are somewhat concern about the company’s dismal August key metrics data that came on the back of a tough retail environment characterized by soft customer demand. Gap’s August comps slipped 2% contrary to a 2% rise in the comparable period last year, as a result of weakness witnessed at Gap Global and Banana Republic Global brands, partly offset by improvement seen at the Old Navy Global brand. Nevertheless, Gap’s net sales of $1.23 billion in Aug 2014 remained flat with the year-ago period.
We remain cautious about the stock’s future performance due to rise in raw material prices and depreciating foreign currencies, which are weighing on the company’s margins. Considering this impact, Gap expects operating margin to remain flat in fiscal 2014.
Furthermore, the company’s business remains prone to competitive risks as well as the difficult macroeconomic environment which is negatively affecting disposable income of the consumers.
Given the above pros and cons embedded in the stock, the company continues to hold a Zacks Rank #3 (Hold).
Other Stocks to Consider
Better-ranked stocks in the retail industry include Citi Trends Inc. (CTRN), Foot Locker Inc. (FL) and Express Inc. (EXPR). While Citi Trends sports a Zacks Rank #1 (Strong Buy), Foot Locker and Express Inc. (EXPR) carries a Zacks Rank #2 (Buy).
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