Neutral Recommendation on Gap - Analyst Blog
05 10월 2011 - 7:04PM
Zacks
We maintain our Neutral recommendation on Gap
Inc. (GPS). Gap is one of the leading players in the
highly fragmented specialty retail sector offering a diverse range
of clothing, accessories and personal care products for men, women,
children and babies. Its flagship brands include Gap, Banana
Republic, Old Navy, Piperlime and Athleta. Gap’s globally
recognized brands complement one another, enabling it to leverage
its position in the sector.
Moreover, in a drive to boost international operations, Gap
consolidated its foreign business under one division from London.
Lackluster sales in North America compelled the company to explore
markets overseas. In order to counter the domestic market
saturation, Gap is aiming to generate 30% of total sales from its
overseas operations and online business by 2013.
To achieve this end, Gap has opened stores in China, Italy and
Australia and has launched its e-commerce business in more than 90
markets, which are expected to further strengthen its top- and
bottom-line performance, moving forward.
To optimize its capital structure, Gap has entered into a new
$500.0 million revolving credit facility maturing in 2016 with a
syndicate of banks comprising BofA (BAC) Merrill
Lynch, Citigroup (C) Global Markets and
JPMorgan (JPM). The new credit facility will
replace the existing $500.0 million revolving credit facility.
Moreover, the company will get a five-year term loan facility of
$400.0 million. This will help in achieving the target of expanding
its international presence.
Also, Gap has established a track record of conservative capital
management and cash returns to shareholders in the form of
consistent dividend payout and share repurchases. During
second-quarter 2011, the company utilized a total of $820.0 million
and $60.0 million, respectively, toward share buybacks and dividend
payments.
On the flip side, Gap operates in a highly fragmented market and
competes with national and local department stores and discount
stores,American Eagle Outfitters, Inc. (AEO). and
The TJX Companies, Inc. (TJX), which offer
products at fire sale prices. To retain the existing market share,
the company may have to reduce its sales prices, which could affect
its margins.
Moreover, Gap’s business is seasonal in nature and generates a
high proportion of sales during the fourth quarter, which is
characterized by the crucial holiday season. The company ramps up
its merchandise levels in anticipation of the season, exposing
itself to significant risks, if the season fails to deliver
expected operating performance.
Besides, the international market exposure renders Gap
vulnerable to currency fluctuation. The weakening of foreign
currencies against the U.S. dollar may require the company to
either raise prices or contract profit margins in locations outside
the U.S. An increase in product price may have a direct impact on
consumer demand.
AMER EAGLE OUTF (AEO): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
TJX COS INC NEW (TJX): Free Stock Analysis Report
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TJX Companies (NYSE:TJX)
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TJX Companies (NYSE:TJX)
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