Impressive fiscal third quarter 2012 (ended October 27, 2012) results, which matched the Zacks Consensus Estimate, as well as high earnings estimates helped Gap Inc. (GPS) achieve a Zacks #1 Rank (Strong Buy).
Since the release of its third-quarter results on November 15, shares of this premier international specialty retailer have increased about 5.7%. Moreover, considering its robust growth (year-to-date return of approximately 92.0%) and the history of beating quarterly earnings estimates (including an average beat of 3.0% over the trailing four quarters), this stock represents an attractive investment opportunity.
The Rank Driver
Sturdy fiscal third quarter 2012 earnings, healthy comparable-store sales, effective cost management and rising earnings estimates are the primary rank drivers for this stock.
Gap, which competes with Ross Stores Inc. (ROST), posted third-quarter earnings of 63 cents a share, in line with the Zacks Consensus Estimate and surged 66.0% from the year-ago quarter’s earnings of 38 cents. During the third-quarter, Gap’s net sales increased 8.0% year over year to $3.864 billion from $3.585 billion in the comparable quarter last year. Moreover, quarterly sales surpassed the Zacks Consensus Estimate of $3.841 billion.
The robust performance was backed by improved margins and healthy comparable-store sales growth of 6% against a 5% decline in the third quarter of 2011. Further, management’s cost cutting initiatives are helping the company to reduce costs and boost profitability.
Healthy quarterly performance has prompted management to raise its fiscal 2012 earnings guidance. The company now expects earnings in the range of $2.20–$2.25 per share for fiscal 2012, an increase of 41%–44.2% from fiscal 2011. Earlier, Gap was expecting earnings in the range of $1.95–$2.00 per share for fiscal 2012, an increase of 25%–28.2% from fiscal 2011.
We believe that the company’s relentless focus on turnaround strategies such as lowering domestic store counts while enhancing international stores for improvising the top line is paying off, which reflected on its solid comps and sales performance in the recent months. The company has posted positive comps for four consecutive months (July, August, September and October) this year.
Further, Gap’s long-term strategic moves, along with its disciplined cost management measures has not only provided the company financial flexibility, but also helped it reduce operating expenses. Moreover, Gap’s globally recognized brands complement one another, enabling it to leverage its position in the sector.