TJX TJX Companies Inc

Gap Inc. (GPS) registered an increase of 4% in same-store sales for the four-week period ended February 25, 2012, breaking its stint of negative comps for seven straight months as warmer weather triggered demand for spring clothing. The company had recorded a decline of 3% in the prior-year comparable period.

February 2012 sales

Net sales for the four-week period ended February 25, 2012 increased 6% to $874 million compared with net sales of $821 million in the prior-year period. The year over year growth was primarily driven by solid same-store sales performances across each of its segments, except International business.

Same-store sales at Banana Republic North America spiked 12% year over year compared with a fall of 4% in the prior-year period. The company’s same-store sales at Old Navy North America grew 5% compared with a decrease of 4% in the year-ago period.

Gap North America’s same-store sales inched up 1% versus 1% fall in the prior-year period. However results at its International segment were a dampener, with the segment reporting a decline of 9% compared with a 7% fall in the prior-year period.

Fiscal 2011 Sales: A Recap

In fiscal 2011, Gap 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 inched down 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.

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 9% and 4.6%, respectively, for the four-week period ended February 25, 2012. Both these companies successfully lured the shoppers with their aggressive promotional activities.

Negative Comps Drags Profit Down

During the last four 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%.

During fourth-quarter 2011, Gap’s earnings slid 27% to 44 cents per share from the prior-period earnings of 60 cents per share, primarily due to a drop of 4% in same-store sales.

Initiatives Taken

In an effort to improve customer experience and enhance productivity per square footage, the company plans 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, including 700 specialty stores and approximately 250 outlets.

Contrary to this, the company is planning aggressively to expand its international and franchise business. Moreover, 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. These moves 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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