Shares of Gap (NYSE:GPS) have performed well so far this year on enthusiasm that its operations will return to a sustained period of sales and earnings growth. A higher share price leaves less room for error, but recent management moves appear promising, as do current improvements in consumer confidence.
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First Quarter Review
Net sales fell 8% to $3.1 billion,on an overall same-store sales decline of 8% that consisted of double-digit declines at the North American Gap and Banana Republic stores. Comps at Old Navy North America held up relatively well, falling only 3% after an 18% plummet last year. International comps also fell a modest 4%.
In terms of brand, management stated that "investment at Old Navy is starting to pay off some early dividends, as marketing and product selection is driving traffic to the stores. There are still concerns about traffic trends at the namesake and Banana Republic stores, with the latter having brought a new merchandise selection individual, though "her real impact on the business won't likely be felt until the early part of 2010."
In other words, though there are encouraging signs, each store concept continues to be a work in progress as consistent sales growth remains elusive. Quarterly gross margins fell 10 basis points but operating expenses fell about 8% and interest expense was eliminated as all debt has been paid down. The end result was a 9% fall in earnings to 31 cents per diluted share, but operating cash flow improved 15% and capital expenditure was nearly cut in half.
The Bottom Line
Analysts currently project full-year earnings of $1.23 per share, which would represent a slight fall from the $1.34 reported during the last fiscal year. The trend is concerning as total company results have fluctuated considerably over the past decade, with earnings per share rising to over $1 per share, but falling back under a dollar as restructuring moves fail to take hold. This has occurred two times now in the past ten years, with concerns that any pull back could mark another recovery that fails to be sustained. (Read Analyzing a Bank's Financial Statements to learn more tools to enhance your financial analysis.)
As it stands currently, Gap is a middle-of-the-road retailer. Firms such as Aeropostale (NYSE:ARO) and the Buckle (NYSE:BKE) have found a way to consistently connect with their customer base, while others, including Abercrombie & Fitch (NYSE:ANF) and Pacific Sunwear (Nasdaq:PSUN) are really struggling to find a pricing scheme or merchandise mix to improve the top and bottom lines.
So while Gap's upside potential is highly uncertain, its downside risk appears minimal. It ended the quarter with $1.7 billion in cash and posts returns on equity in excess of 20%, demonstrating that its existing store base generates ample capital. The missing ingredient is sustainable growth, with further stock gains dependent on pushing earnings close to $2 per share. (Check out Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
