Stock for the Santa Claus Rally - GAP

The Christmas season and the so-called "Santa Claus Rally" suggest that during this time, companies likely to earn above-average profits may be those in the retail industry. As it turns out, in the case of GAP, these predictions prove to be correct.

• GAP (GPS.US) beat Wall Street's expectations for quarterly revenue on Thursday, but gave a cautious outlook for the holiday season.
• The apparel retailer - which includes its namesake brand, Banana Republic and Athleta - predicts that its total net sales in the fourth quarter of 2022 could be down 1% to 5% y/y
• Gap's net income rose to $282 million, or 77 cents per share, a significant improvement from a net loss of $152 million, or 40 cents per share, in the same period a year ago. Revenues rose 2% to $4.04 billion from $3.94 billion in the same quarter in 2021.
• The company is looking for a new CEO after Sonia Syngal resigned from her position this summer following a high-profile split with Ye's Yeezy brand. Ye, formerly Kanye West, terminated his contract with Gap in September, citing breach of contract. Gap removed all Yeezy products from its stores in late October, after West made anti-Semitic remarks publicly. Gap announced Thursday that it had incurred $53 million in impairment charges related to Yeezy Gap.

Comparable sales

• Comparable sales, which show revenue online and in stores open for at least 12 months, rose 1% from the year-ago period. Analysts had expected comparable sales to decline 3.2%, according to StreetAccount estimates. Online sales were up 5% from last year and accounted for 39% of total net sales.

Here's a closer look at each of the company's business segments:

 

• Gap's namesake brand, known for jeans and basics: comparable sales rose 4% globally and were flat in North America. The company said it did better in inventory, but had weaker sales in the children's and infant categories.
• Old Navy, known for its casual apparel for adults and children: comparable sales fell 1%. The brand saw weaker demand for children's and infant apparel and suffered from low-income consumers feeling stretched by inflation.
• Banana Republic, known as a destination for suits and dresses: comparable sales rose 10%. It is looking for a new direction after the pandemic disrupted the typical fashion routine - causing more people to work from home several days a week and dress more casually on the days they go to the office.
• Athleta, an activewear brand: comparable sales were flat as shoppers shifted to buying more occasion and work outfits. The company is capitalizing on a time when Americans were eager to stock up on stretchy leggings, workout tops and other comfortable loungewear when they spent time at home.
• So far this year, the company has closed a total of 29 Gap and Banana Republic stores in North America. It currently expects to close about 30 additional stores this year, as part of a goal to close 350 stores in North America by the end of fiscal 2023.
• However, the company is on track to open 30 Athleta stores and currently plans to open 10 Old Navy stores by the end of this fiscal year.

Major risk factor 

The retailer is struggling with an excess of clothing, it is outdated by season, style or is the wrong size. Significant inventory has become a problem for many retailers, including Gap. A year ago, Gap struggled to meet demand as factories were temporarily closed due to Covid, and goods were stuck in crowded ports. The retailer went so far as to pay extra to ship clothes by air. But delays and backlogs meant that some seasonal goods still arrived too late. Gap's inventory rose 34% in the first quarter and 37% in the second quarter. Gap was forced to offer deep discounts, which reduced profits. By the end of the third quarter, the stock was up 12%,.

Old Navy faced a more specific inventory problem: the division decided to offer more clothing for plus-size women, but the move led to too many plus sizes left in stores and not enough popular sizes. Gap said Thursday that Old Navy made strides in the third quarter to improve the balance of sizes offered, which boosted sales.

GPS.US stock chart, D1 interval Source: xStation

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