Gap's (GPS) Strategic Endeavors Look Good: Time To Hold?

The Gap, Inc. (NYSE:GPS) seems to be picking pace as it remains on track with its strategic growth endeavors and turnaround efforts, which are reaping benefits. The company’s strategic plans mainly focus on keeping track with the accelerated pace of change in the apparel industry. The company intends to speed up its transformation plan by bringing meaningful changes to its product portfolio and operating capabilities worldwide.

As part of enhancing its product portfolio, the company is focused on growing its brands in regions which offer greater structural advantage and potential to expand market share, while closing the underperforming stores. This is expected to result in nearly 75 store closures.

Additionally, the company remains keen on streamlining its operating model by creating a more proficient global brand structure. While these actions are likely to attract annualized sales loss and restructuring charges, they are anticipated to deliver annualized pre-tax savings of $275 million and operating margin growth of about two percentage points. Clearly, Gap remains committed to position itself better for long-term growth by setting its priorities right and channelizing its resources accordingly.

Further, these initiatives have helped the company outperform broader industry in the past one year. Shares of Gap increased 14.6% and fared better than the Zacks categorized Retail-Apparel/Shoe industry’s decline of 19.1%. Moreover, this Zacks Rank #3 (Hold) stock exhibits a VGM Score of “A”, with a long-term earnings growth rate of 8%, which highlights its growth potential.

This is not all. In a bid to outdo the effects of the fading popularity of brick-and-mortar stores, Gap is enhancing its e-commerce and omni-channel capabilities by offering facilities such as “find-in-store”, “Reserve-in-Store” and “Order in Store” across various stores. Also, the company recently came up with an app – DressingRoom by Gap. This app will enable customers to try clothes through reality experiences generated via smart phones. Further, in fiscal 2016, Gap’s mobile point of sale functionality improved to nearly 20% of its domestic fleet.

These efforts helped the company post a solid first-quarter fiscal 2017, wherein both earnings and sales topped estimates. While earnings beat came after in-line results in the last two quarters, sales marked its fourth consecutive beat. Further, it witnessed an improvement in comps driven by continued growth at Old Navy. Gap’s progress towards improving product quality and fit, as well as better responsiveness to trends and demand, also aided results.

However, foreign currency headwinds, a challenging retail environment, and weakness across Gap and Banana Republic brands impacted results. Management expects currency woes to hurt fiscal 2017 results, as is clear from soft outlook. This led the Zacks Consensus Estimate for the second quarter to trend downward. Stiff competition also remains a threat.

Nonetheless, we commend Gap’s progress on transformation plan and focus on enhancing omni-channel reach. All said, will Gap’s growth plan sustain its momentum amid a tough retail landscape? Let’s wait and watch.

Other Key Picks

Better-ranked stocks in the retail space includes Big 5 Sporting Goods Corporation (NASDAQ:BGFV) , The Children's Place, Inc. (NASDAQ:PLCE) and Build-A-Bear Workshop, Inc. (NYSE:BBW) each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big 5 Sporting has an average positive earnings surprise of 94.5% in the trailing four quarters and a long-term earnings growth rate of 12%.

The Children's Place has an average positive earnings surprise of 36.6% in the trailing four quarters and a long-term earnings growth rate of 8%.

Build-A-Bear Workshophas an average positive earnings surprise of 67.5% in the trailing four quarters and a long-term earnings growth rate of 22.5%.

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