Gap Climbs After Surprise Comp Sales Increase Amid Tough Holiday For Retailers
Shares of Gap (GPS) jumped in pre-market trading after the retailer posted a surprise increase in December comparable store sales led by the performance of Old Navy, a bright spot in an overall gloomy holiday season for retail. In addition to reporting better than expected holiday season results, Gap raised its adjusted earnings per share view for fiscal 2016.
HOLIDAY SEASON RESULTS, GUIDANCE RAISE: Gap yesterday after the market close said that same-store sales were up 2% for the combined November-December holiday period, with net sales up 1% from the year-ago period. The retailer's comparable sales rose 4% in December, with the improvement being led by Old Navy, where SSS rose 12% vs. a 7% decrease last year. Comparable sales at its namesake Gap brand were up 1% vs. down 2% last year, while Banana Republic's SSS fell 7% vs. a 9% decrease last year. Net sales for the December period were up 3% to $2.07B. Based on the improved momentum seen over the holiday season, driven buy a positive customer response at Gap and Old Navy, Gap CFO Sabrina Simmons said the company now expects adjusted EPS for FY16 to be "modestly above" the high end of its previous guidance range of $1.92.
WHAT'S NOTABLE: Mall-based retailers, including Gap, have been hurt by the increasing popularity of fast-fashion retailers like Zara, Forever 21 and H&M, as well as an increase in online shopping. Earlier this year, Gap said it would take steps to better position the company for improved business performance and that it was identifying opportunities to streamline its operating model to be "more efficient and flexible." In November, Gap CEO Art Peck said he was "feeling very good" about the product in the company's stores across all of the brands. CFO Simmons commented at the time that Gap was "investing meaningfully" in marketing across its portfolio brands during the holiday season. Simmons said, "We are not necessarily expecting an immediate payback from these investments but consider them to be important for the longer term health of the business." Simmons also commented that Gap expected the negative impact from the fire at its Fishkill distribution center to be just over one comp point in Q4.
PEERS: Gap's strong holiday season results follow disappointing results from Macy's (M) and Kohl's (KSS) earlier this week. On Wednesday, both Kohl's and Macy's announced sales slumps for the holiday period and cut their guidance for 2016. Macy's, which said it expected sales "would be stronger" and cited the broader challenges facing the retail industry, also announced plans to close 68 locations and cut around 6,200 jobs. Another peer, American Eagle Outfitters (AEO), reported "approximately flat" Q4 SSS to date, while L Brands (LB) said its December SSS declined 1%.
ANALYST COMMENTARY: Jefferies analyst Randal Konik reiterated his Buy rating and $36 price target on Gap this morning and said he believes Gap is a "key beneficiary" of the current fashion cycle, which includes the "resurgence" of denim. At the same time, Konik noted that Banana Republic "is still trying to find itself."
PRICE ACTION: Gap is up nearly 9% in pre-market trading.
OTHERS TO WATCH: Many others in the retail sector are lower this morning, including Macy's, Kohl's, American Eagle, Nordstrom (JWN), Abercrombie & Fitch (ANF) and Urban Outfitters (URBN).
Disclosure: None.