Gap Rallies After September Report Shows Strong Response To Old Navy Brand
Shares of Gap (GPS) rallied in morning trading after the retailer said same-store sales increased 4% at its Old Navy brand in September, despite its namesake brand again posting lower comparable sales. Following the company's September sales release, analysts were mainly upbeat on the stock.
OLD NAVY AGAIN A BRIGHT SPOT IN SEPTEMBER: Gap said on Thursday after the market close that total company same-store sales fell 3% in September versus a decline of 1% last year. Comparable sales were up 4% during the month in Old Navy, in line with last year, following a 1% increase in comp sales last month. At the same time, comp sales at the Gap Global brand declined 10% versus flat last year and comparable sales at the Banana Republic were down 9% after falling 10% last year. Total net sales for the five-week period fell 2% to $1.43B from $1.46B last year.
DISTRIBUTION CENTER FIRE: Gap said that a late August fire at its Fishkill distribution center in New York hurt its same-store sales by about 3 percentage points and the retailer expects its comp sales will be hurt by a similar amount in October. The company sees a "negative" impact to fourth quarter comp sales as a result of the fire. In a recorded message discussing September's sales results, Gap said that the fire destroyed about 12M units, primarily for the Gap brand. The company said September margins "actualized significantly higher than previously forecasted," which more than offset the negative effects from lost sales and logistics costs related to the fire.
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." At September's Goldman Sachs retailing conference, CEO Art Peck said the company was "seeing a change in consumer buying patterns," noting a shift to online as well as "the lack of a need to refresh our closet." At the time, Peck said the consumer is "healthy," but "she is not in fashion apparel in the way that she has been over the last several years."
ANALYST REACTION: This morning, Deutsche Bank analyst Paul Trussell upgraded Gap to Hold from Sell and said that while price competition with fast-fashion rivals will continue, the company's near- to medium-term setup is "more favorable." Trussell sees easing compares over the next few months as well as an improved apparel backdrop. Jefferies analyst Randal Konik raised his price target for Gap shares to $32 from $30 following the retailer's September results, noting that Old Navy trends are accelerating while a bottom is setting in at Gap's namesake brand. The analyst said the downside is "fairly limited" and believes there is "sizable upside potential." However, UBS analyst Michael Binetti said that while September margins were higher than expected, he is cautious on the company's ability to pull back on promotions to drive a comp inflection. Binetti also said that Gap will close some stores this week amid Hurricane Matthew, which will further impact October sales. Binetti reiterated his Sell rating and $16 price target on Gap shares.
PRICE ACTION: Gap is up about 12% to $25.53 in morning trading.
OTHERS TO WATCH: Other apparel and mall-based retailers trading higher this morning include American Eagle (AEO), Nordstrom (JWN), Abercrombie & Fitch (ANF) and Urban Outfitters (URBN).
Disclosure: None.