Gap Pulls Further Ahead of Rivals

Gap once again proves that it's ahead of the game, able to predict and adapt to shifting consumer preferences.

May 19, 2014 at 12:39PM

The teen fashion market is, at best, a fickle one, this choosy demographic easily changing its preferences in an unpredictable way. This means that companies operating in the space must be very much in touch with their customers and able to adapt to a quickly changing retail environment. Several companies have struggled with this over the last few years and, as such, have seen their stock prices languish. One retailer has managed to stay ahead in this tough retail environment. How does Gap (NYSE:GPS) maintain its supremacy?

April sales
Once again, Gap released figures that beat the Street's expectations. April was certainly a good month for the apparel retailer. Overall net sales were up 10% to reach $1.33 billion, while comp-store sales rose a whopping 9% for the month, up from a 7% increase last year. Analysts had expected a rise in comp-store sales of only 0.1%. By brand, Banana Republic and Old Navy did particularly well, with comp-store sales rising 7% and 18%, respectively.

Furthermore, the company raised its forecast for the first quarter, now expecting a profit of $0.56-$0.57 per share. Analysts were calling for a profit of $0.54 per share. Also, the drop in gross margin will narrow from the year-over-year decline in the fourth quarter. Shares jumped some 5% in after-hours trading following the release.

Overall, U.S. retailers did well in April, with comp-store sales rising 6.2% for the best monthly performance since June 2011. Partly, this was due to the Easter shift and an effective use of promotions, but the weather also played a part. After the brutal winter, a spot of good weather unleashed a great deal of pent-up demand, as consumers once again trekked over to the store to buy things.

Still in fashion
It seems that Gap is still regarded as fashionable by its core audience, which seems to be driving its earnings potential going forward. The same cannot be said for Ralph Lauren (NYSE:RL), looking at its most recently presented outlook. As opposed to Gap, the luxury fashion company lowered its projections for the current quarter and full year.

While Ralph Lauren delivered some strong numbers for its fourth quarter, with earnings per share beating by $0.05 on a 14% increase in sales, the forecast for the current quarter was far from rosy. The company is now expecting revenue growth of between 3% and 5%, well below the 10% increase projected by analysts. For the full year, the company sees sales growth of between 6% and 8%, also in a range largely below the 8% consensus estimate.

So what sets Gap apart? First of all, the company has a solid history of tapping into fashion trends, displaying the ability to spot shifts in consumer preferences ahead of the competition and the flexibility to adapt to these changes. Second, the company has been investing in its omnichannel sales capabilities, rolling out an order-in-store system and expanding its online footprint. Third, the company has been working on its international business, having opened its first Old Navy location in China in March. Management seems determined to keep this solid growth going, and so far, it has succeeded.

The bottom line
In an industry that has faced some serious headwinds over the last few years, there is one apparel retailer that clearly stands out above the rest of the pack. Gap has been able to consistently outperform the market for some time now, with April sales and its most recent outlook showing it is pulling further ahead of rivals such as Ralph Lauren yet again. Capable of spotting and adapting to fashion trends before the competition, Gap has proven itself to be a formidable force in fashion retail.

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