Gap's (GPS) 70% Rally Could Continue into 2013

Shares of apparel retailer Gap Inc. (GPS: Charts, News) rallied last week after the company posted strong same-store sales growth in December that exceeded analyst expectations. Global same-store sales rose 5% over the five-week December period, compared to 4% growth in the previous year.

This is an encouraging sign for investors, since Gap has now posted six consecutive months of same-store sales growth in North America. In 2012, Gap stock rallied over 70%, outperforming most of its industry peers. Daily Chart
Net sales for December also rose 5% from $1.98 billion to $2.08 billion. Year to date through the end of 2012, Gap posted net sales growth of 6% to $14.52 billion, compared to $13.72 billion last year. Gap attributed its strong growth to successful holiday promotions and continued strength in its core North American brands. Gap's board of directors also recently approved a new $1.0 billion share buyback plan. Since the start of January, Gap has already bought back approximately 17 million shares worth $539 million. Gap's three flagship brands - Gap, Old Navy and Banana Republic - all posted increased same-store sales in North America. Gap, it's mid-priced business, posted a 2% increase in comparable store sales, an improvement over the 4% decline a year ago. Its lower-priced Old Navy stores posted a 13% gain in same-store sales, up from a 4% decline. Lastly, its higher-end Banana Republic stores posted a 1% gain versus a 2% decline last year. Gap is also the parent company of athletic wear retailer Athleta, which competes with yoga apparel leader Lululemon (LULU: Charts, News), and "affordable luxury" boutique Piperlime, which is prominently featured on Lifetime's "Project Runway." Gap recently acquired high-end women's retailer Intermix for $130 million, which will give it a luxury brand that sells clothing at higher margins than its Banana Republic brand. Intermix is considered a fashion boutique, frequented by celebrities and well known for its $1,500 Herve Leger dresses. Intermix, which owns 32 boutique stores, would benefit from Gap's massive distribution network, which will help its brand spread overseas into previously unreachable markets. NBG Productions analyst Brian Sozzi noted the experimental nature of the Intermix deal, stating, "Gap is trying to gain intelligence on how it could bring pricier, trendier merchandise in a more affordable way to its other divisions." Sozzi is notably bearish on Gap in the short term, and suggests that the Intermix acquisition and stock buyback were introduced to distract investors from peaking operating margins. Sozzi asked, "They've extracted so many costs and closed so many stores, how much more can they push this without doing something else like a buyback?" Although Gap fared well at home, its international same-store sales dropped 6%, in line with its decline last year. Gap's December gains are roughly in line with its industry peers. Ross Stores (ROST: Charts, News) and Nordstrom (JWN: Charts, News) reported 6% and 8.6% growth in same-store sales, respectively. Although Gap hit all-time highs last year, the stock is still trading at 12.6 times forward earnings with a 5-year PEG ratio of 1.58, making it a fairly cheap stock with strong growth potential. The stock also pays a quarterly dividend of 12 cents per share, a 1.56% yield at current prices. Other News About GPS Gap's December Comps Perk Up Gap posts its sixth consecutive month of same-store sales gains. Gap Inc. Acquires INTERMIX Gap buys a high-end retailer for $130 million. Other Stocks in the News Apple: Still The Cheapest Stock On Wall Street Although Apple is still fundamentally cheap, will investors give it another chance? J.C. Penney: Should Investors Have Patience With CEO Ron Johnson Can Ron Johnson prove himself before investors flee? Copyright 2013 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Jan 7, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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