TJX TJX Companies Inc

One of the leading global specialty retailers, Gap Inc. (GAP), continues to record comparable store sales results in the red. Last January, Gap registered a decline of 4% in same-store sales for the four-week period ended January 28, 2012, with sales declining across the board. The year-over-year comparison also looked jaded with the company recording a growth of 3% in the prior-year comparable period.

January 2012 Sales

Gap witnessed a contraction in same-store sales across each of its segments, except Banana Republic North America. Gap North America’s same-store sales declined 5% versus 2% rise in the prior-year period.

The company’s same-store sales in the international region plunged 10% compared with an increase of 9% in the year-ago period. Same-store sales at Old Navy North America fell 6% compared with flat last year. However, the company reported growth of 6% in Banana Republic North America segment compared with a positive 2% growth in the prior-year period.

Net sales for the four-week period ended January 28, 2012 inched down 1% to $833 million compared with net sales of $843 million in the prior-year period, primarily driven by sluggish performances across all of the company’s businesses.

Fourth-Quarter 2011 Sales

During fourth-quarter 2011, the company’s comparable sales declined 4% compared with an increase of 1% in the prior-year quarter. Consequently, Gap’s net sales during the quarter inched down 2% to $4.28 billion compared with $4.36 billion in the previous-year quarter.

The company has reported negative comparable sales result in all the four quarters of fiscal 2011. However, despite declining comparable sales result, the company is expecting earnings in the range of 41 – 42 cents per share, well above the Zacks Consensus Estimate of 35 cents.

Fiscal 2011 Sales

In fiscal 2011, Gap has reported a decline in comparable sales every month, except April and June. During the fiscal, 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 net sales dropped 1% to $14.55 billion from the prior-year sales of $14.66 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 holiday season did not help the company to inflate its sales figures in December 2011. However, the company is taking strategic steps to counter the domestic market saturation.

Gap is losing its market share against its rivals, The TJX Companies Inc. (TJX) and Macy’s Inc. (M), who registered same-store sales growth of 7% and 2.4%, respectively, for the four-week period ended January 28, 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 have 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, 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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