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The immediate prospects of apparel manufacturer and marketer The Gap (NYSE: GPS ) seem unimpressive. The coming U.S. holiday season looks tough for the company and its retail sector peers. Its flat September sales are nothing to crow about either.
Nevertheless, investors may miss out on a good buy if Gap is left off their radar screens. This 44-year-old San Francisco-based company looks primed to tackle the expected dreary holiday sales ahead and the challenges beyond. Reporting strong second quarter results this August and reflecting confidence, it raised its full year guidance to the $2.57–$2.65 range from $2.52–$2.60 earlier.
Peers on the retreat
Gap's buoyant mood represents one of the few bright spots in the retail sector. The outlook appears to be the opposite at Abercrombie & Fitch (NYSE: ANF ) , which also makes and sells different brands of clothing that cater to a variety of demographics. Expecting a drop in its third quarter sales, Abercrombie forecast earnings per share for the period at $0.40–$0.45 against analysts' expectation of $1.05. The company's second quarter profits plunged 33%, adding to the woes of A&F.
Urban Outfitters (NASDAQ: URBN ) , which also has multiple brands addressing various market segments, is having a rough ride lately as well. It slumped to a 20-month low in September on the market's dismay over its comment in a U.S. regulatory filing that its third quarter sales have been rising at a "mid-single digit" pace. The company hasn't delivered the revenues investors expected in the past two quarters.
Further market disappointments seem in the offing as Urban Outfitters appears to have relaxed its pricing discipline in order to clear inventory. Notably, the fierce competition in the teen segment prompted it to offer an added 30% on all clearance items during the Labor Day weekend, something it didn't do last year.Adding to these woes, a federal securities fraud class action suit has been initiated against Urban Outfitters following the company shares' sharp decline on weak second quarter results and the disappointing third quarter guidance.
Strong push via marketing
September was eventful for Gap as well, but not because of a legal issue; its global "Back to Blue" marketing campaign for this fall debuted. This marks the company's return to TV advertising (recalling iconic ads of yesteryear) and parlays Gap's strength as a cross-generational brand.
This latest attempt to excite the market utilizes the three-screen strategy (TV, desktops, and smartphones/tablets as the media tools), as well as employs digital and social elements across Gap's websites and social media channels. The campaign also incorporates in-store digital engagement to further enhance the shopping experience of Gap customers.
Opening more customer channels
This thrust meshes perfectly with the company's innovative omni-channel sales and marketing strategy. With this tack, customers are given wide-ranging options on engagement via e-commerce solutions such as Gap's "ship-from-store," "find-in-store," and "reserve-in-store" programs.
For the past two quarters, the company's e-commerce sales have grown 27%. This helped propel Gap's second quarter year-over-year net sales growth of 8% to $3.87 billion. The omni-channel strategy that facilitates sales online, or via a brick-and-mortar store, or through a combination of both, also installed Gap as No. 3 overall and the top retailer in InformationWeek's 500 leaders in technology innovation.
Expansion in growth markets
A dynamic global expansion strategy should also drive Gap's future growth. For 2014, the company's iconic Old Navy brand will break ground for franchises in China and the Philippines, which are neck and neck in leading economic growth in Asia. In addition, the opening of Gap's first store in Taiwan is scheduled for the first half of 2014. Notably, e-commerce sites dedicated to these Asian growth markets are also part of Gap's expansion initiatives.
Gap's brand portfolio, developed since 1969, is well-positioned to thrive in international markets with its balance and superb product differentiation. The mainstay lineup of Gap, Old Navy, and Banana Republic brands which cater to distinct market segments has been enriched by the newer Athleta, Intermix, and Piperline. This mosaic of brands enables Gap to effectively address highly fragmented and constantly changing consumer wants and needs in the apparel market.
The current weakness of the retail sector may be an opportune time to initiate or bolster a position in this company. Gap's shares currently trade some 20% below the 52-week high of $46.56. The high was set in August shortly prior to the release of its strong second quarter results.
Through marketing savvy and diversified product brands, plus a growing international growth platform, Gap should weather difficulties in its U.S. home market and continue to reward its shareholders.
Can Gap rule retail?
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.