Why Gap Has Its Sights on Lululemon and American Eagle Outfitters

Gap (NYSE: GPS  ) will release its quarterly report on Thursday, and investors have been a bit on edge recently, with the stock reacting sharply in both directions to conflicting news about the retail giant. What's clear, though, is that Gap's strategy is to take the best of lululemon athletica (NASDAQ: LULU  ) and its success in tapping the athletic-apparel market, and combine it with Gap's existing strength against American Eagle Outfitters (NYSE: AEO  ) and other traditional clothing retailers.

Gap has had a storied history over the years, proving to be just as vulnerable to the changing trends of fickle fashion shoppers as any other retailer. After soaring to new heights in the late 1990s, Gap suffered its own lost-decade of stagnant returns during the 2000s, as multiple turnaround efforts failed to bear fruit quickly. In recent years, though, Gap has finally moved in the right direction, and investors want Gap's current strategy to keep supporting growth well into the future. Let's take an early look at what's been happening with Gap over the past quarter, and what we're likely to see in its report.

Stats on Gap

Analyst EPS Estimate

$0.71

Change From Year-Ago EPS

12.7%

Revenue Estimate

$3.98 billion

Change From Year-Ago Revenue

2.9%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Just how high can Gap earnings go?
Analysts have had mixed views on Gap earnings recently, boosting their October-quarter estimates by $0.01 per share, but cutting their fiscal 2014 and 2015 projections by 1% to 2%. The stock has bounced around furiously during the past quarter, but is down just 2% since mid-August.

Gap has already given investors an early look at what it's likely to report, and they liked what they saw. Preliminary figures for the October quarter showed same-store sales rising 1%, and Gap reaffirmed its previous guidance on inventory figures. Despite falling merchandise margins compared to last year, investors breathed a sigh of relief, and sent the stock up more than 10% on the news.

That guidance continues a favorable trend for Gap. In its July quarter, Gap boosted same-store sales by 5%, compared to a 7% drop for American Eagle Outfitters. Even though Gap's Banana Republic line suffered negative comps, both Old Navy and the namesake Gap brands more than made up for that weakness. Yet, one reason for the stock's big move upward was that Gap had previously announced disappointing September sales figures that panicked shareholders into a big drop.

Gap is looking to keep pushing its advantage by continuing with its successful strategies. The retailer has ambitious plans to open more of its Athleta stores, which pose a direct threat to Lululemon and its past dominance of the women's athletic apparel space. Yet, even with the boost, Gap will likely have just a third of the store count that Lululemon has, giving Gap plenty of room to grow further in 2014 and beyond.

Gap still faces challenges, though. International expansion efforts are an important part of Gap's potential growth strategy, but Europe, in particular, has been a challenging environment for the company. Some also believe that Gap still has an outdated fashion sense, although attempts to update its image have started to bring in the key teen demographic that's so important to ensuring Gap's success for another generation.

In the Gap earnings report, look for more color on the company's plans for the future. In particular, with the holiday season upon us, early signs of how Gap is faring in the current quarter could have huge ramifications for the stock both now and in the long run as it fights to grab share from Lululemon and pick up teen shoppers from American Eagle Outfitters and its rivals.

Can Gap be the best stock in 2014?
Gap and the broader market both soared in 2013, but we've got another stock for opportunistic investors looking for huge winners next year. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

Click here to add Gap to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2735820, ~/Articles/ArticleHandler.aspx, 12/22/2014 7:45:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement