Filed Under: , ,
Tickers in this Article: GPS, AEO, ANF, ARO, LTD, URBN
Apparel retailers have been some of the biggest casualties of a down economy as consumers pinch pennies in response to rising unemployment and falling 401(k) values. Gap (NYSE:GPS) shares have not gone unscathed in this environment and are down about 40% over the past two years. However, this is slightly ahead of what the market has returned over this time period and is significantly better than many peers. Better yet, Gap has significant upside potential from here.

IN PICTURES: Top 7 Social Security Myths: Exposed

Current Results
On February 26, Gap reported fourth-quarter results that saw sales fall 13% to $4.1 billion on double-digit same-store sales declines in its three North American concepts. These included the namesake stores (27% of sales), Banana Republic (16%) and Old Navy (37%). International sales fell a moderate 4% but only accounted for 12% of sales. Online sales were a rare bright spot and grew 10% to $319 million, although they only accounted for 8% of sales. Full-year sales fell 8% to $14.5 billion as comps declined by double digits again at Banana Republic and Old Navy, with Gap posting a more moderate 8% decline and international sales another 4% fall.

"Significant cost savings" helped Gap report Q4 earnings of 34 cents per share. This represented a 6% decline from last year's quarter but was enough to beat analyst projections of 32 cents. It also managed to grow full-year earnings 29% to $1.35 per share on double-digit declines in COGS and operating expenses. Operating cash flow ended up falling 32% to $1.4 billion, but management cut capex significantly to report free cash flow of $981 million, or approximately $1.36 per share.

Bottom Line
Gap ended the year with $1.7 billion in cash and no long-term debt, leaving plenty of financial cushion to withstand any further difficulties on the sales front. No debt also means that return on invested capital is the same as return on equity, which came in at an impressive 22% and demonstrates that Gap earns high returns for shareholders. The wild card is when sales stabilize as management tries to revive mature store bases that have also been hit by the global recession. (For further reading on debt and company debt management, be sure to check out our Debt Ratios Tutorial.)

What's Ahead
To try and move merchandise and shore up near-term sales, Gap - like peers American Eagle (NYSE:AEO), Aeropostale (NYSE:ARO) and even Abercrombie & Fitch (NYSE:ANF) - is relying on discounts. Early indications are that February sales may be perking up at other rivals such as Urban Outfitters (Nasdaq:URBN) and Limited Brands' (NYSE:LTD) store base.

Time will tell how Gap's results play out, but so far it is proving it can remain profitable despite one of the worst periods for retailers in recent memory.

Learn more about investing in stocks such as these in our related article, Analyzing Retail Stocks.

comments powered by Disqus

Trading Center