One Fashion Retailer Bucking the Trend

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After a string of disappointing results from several large US fashion retailers, some investors are questioning the industry's prospects. Faced with declining same-store sales, and in some cases disappointing earnings, the last few weeks haven’t been easy for apparel stores. The Gap (NYSE: GPS) however seems to be doing alright in this challenging climate, delivering results above the consensus. Let’s take a look at their most recent earnings report.

Stock Overview

The Gap, based in San Francisco, is one of America’s largest and best known fashion retailers. It currently operates over 3,400 stores in 90 countries worldwide, with some 136,000 employees. The company’s brands include names such as Gap, Old Navy, Banana Republic, and Athleta. The stock has a market cap of $18.9 billion and has rallied nearly 60% over the last year. It yields 1.5% at a payout ratio of only 25%.

Earnings Strength

Towards the end of May, the Gap announced Q1 2013 results that came in slightly ahead of analyst expectations. The company reported EPS of $0.71, beating by $0.02 and up over 50% from $0.47 in the same period a year ago. Net sales were up 6.9% to around $3.7 billion with gross margin improving to 41.4%. Managing to capitalize on its online business, e-commerce revenue was up around 26.6%, which is important as it reflects the company’s ability to keep up with a changing consumer environment.

Some other figures from the report were equally encouraging. Gross profit soared 12.3%, while operating income was up a huge 34.2% to $530 million. Comp sales were up 2% overall, with continued strength in its three main global brands, Gap, Old Navy, and Banana Republic. Specifically, comp sales for Gap and Old Navy were up 3% each, while Banana Republic was flat. For the rest of 2013, the company is holding to its previous guidance of EPS between $2.52 and $2.60.


Some other American apparel retailers haven’t been faring as well as the Gap lately. Notably, Abercrombie & Fitch (NYSE: ANF) came out with disappointing results recently. The company reported a Q1 2013 loss of $0.09 per share, versus a consensus estimate loss of $0.05 per share, sending the stock down some 10% following the news. Comp store sales declined by a whopping 17% and revenue declined by 9%. Additionally, the company lowered its guidance for the full-year, expecting the weakness in comp store sales to continue. Nevertheless, the stock is up over 56% over the last year.

American Eagle (NYSE: AEO) is another competitor facing slowing sales. While the company’s Q1 EPS of $0.18 beat by $0.01, this figure was down from $0.22 in the year-earlier period. Revenue was down 4%, but also came in ahead of the consensus. Management cited a tough economic environment and cool weather as a drag on sales, but is fairly optimistic about the company’s long-term outlook. Nevertheless, the company gave guidance for the quarter that missed estimates on the both the top and the bottom line. Apparently, the numbers weren’t as bad as investors had feared, the stock rising following the report.

Valuations and Metrics

The Gap isn’t only the best performing of the stocks mentioned here, but it is also the cheapest looking at the P/E ratio. The stock currently trades at 15.78 times trailing earnings, versus Abercrombie & Fitch’s 16.16 and American Eagle’s 17.82. Moreover, the company’s operating margin of around 13% is slightly ahead of the competition, while the return on equity of 40% is excellent. Moreover, the balance sheet is strong, with around $1.61 billion in cash and some $1.25 billion in debt for a total debt to equity ratio of 39.45.

The Bottom Line

Several US fashion retailers have come out with disappointing first-quarter results recently, painting a less than encouraging image of the industry’s prospects. Yet, things aren’t all bad. The Gap actually delivered some fairly strong results for the quarter, with earnings, comp store sales, and revenue on the rise. Additionally, the stock is trading at a discount to some of its major competitors. 

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