TJX TJX Companies Inc

The New Year brought no cheer for one of the leading global specialty retailers, Gap Inc. (GAP). The company continues to record comparable store sales results in the red. Last December, Gap registered a decrease of 4% in same-store sales for the five-week period ended January 1, 2012, with sales declining across the board. The year-over-year comparison also looked jaded with the company recording a narrower decline of 2% in the prior year comparable period.

December 2011 Sales

Gap witnessed a contraction in same-store sales across each of its segments. The company reported a decline of 2% in Banana Republic North America segment compared with a positive 2% growth in the prior-year period. Gap North America’s same-store sales declined 4% versus negative 6% in the prior-year period. The company’s same-store sales in the international region plunged 6% compared with a fall of 3% in the year-ago period. Same-store sales at Old Navy North America fell 4% compared with flat last year.

Net sales for the five-week period ended January 1, 2012 inched down 1% to $1.98 billion compared with net sales of $2.01 billion in the prior-year period, primarily driven by sluggish performances across all of the company’s businesses.

Year-to-date Sales

Since the beginning of fiscal 2011, i.e., February 2011, Gap has reported a decline in comparable sales every month, except April and June. Year-to-date, the company has reported a decline of 4% in comparable sales compared with an increase of 2% during the same period in fiscal 2010. Accordingly, Gap’s year-to-date net sales dropped 1% to $13.72 billion from the prior-year period sales of $13.82 billion.

Why Negative Comps?

The company faced a number of challenges during the busiest shopping season of the year. Lackluster sales in North American region have continuously dragged down Gap’s comparable store sales throughout fiscal 2011. Moreover, the Black Friday weekend did not help the company to inflate its sales figures in November 2011. However, the company is taking strategic steps to counter the domestic market saturation.

Gap is losing its market share against its rivals, such as The TJX Companies Inc. (TJX) and Macy’s Inc. (M), who registered same-store sales growth of 8% and 6.2%, respectively for the five-week period ended January 1, 2012. Both these companies successfully lured the shoppers with their aggressive promotional activities.

Negative Comps Dragging Profit Down

During the last three quarters of fiscal 2011, the company’s declining comparable sales has negatively impacted its quarterly performance. Comparable sales in the first quarter declined 3%, resulting in a drop of approximately 11% in earnings per share. During the second quarter, Gap’s earnings per share plummeted approximately 3%, primarily due to a decline of 2% in comparable sales. The third quarter was also not a happy tale for the company, as its comparable sales fell by 5%, dragging earnings per share down by 21%.

Initiatives Taken

In an effort to improve customer experience and enhance productivity per square footage, the company intends to strategically close and consolidate square footage at Gap and Old Navy brands. Gap intends to strategically reduce its Gap North America store counts to 950 by the end of fiscal 2013, consisting 700 specialty stores and approximately 250 outlets.

Contrary to this, the company is planning aggressively to expand its international and franchise business. The company intends to triple the Gap store count in China from 15 to approximately 45 during the next 12 month period. Moreover, the company is anticipating opening a total of 60 new franchise stores by the end of fiscal 2011, of which it has already opened 33.

Moreover, in a drive to boost its international operations, Gap consolidated its foreign business under one division in London. Lackluster sales in North America compelled the company to explore the overseas market. In order to counter the domestic market saturation, Gap is aiming to generate 30% of total sales from the overseas operations and online business by 2013. To achieve this end, Gap has opened stores in China, Italy and Australia, and has launched the e-commerce business in more than 90 markets, which are expected to further strengthen its top and bottom lines, moving forward.

Conclusion

We believe that the company’s long-term strategic moves along with disciplined cost management measures will not only provide financial flexibility, but will also help to drive value proposition. Moreover, Gap’s globally recognized brands complement one another, enabling it to leverage its position in the sector.

Currently, Gap’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Our long-term recommendation on the stock remains ‘Neutral’.

 
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