Shares of Gap Inc. (GPS 5.26%) soared 15.2% on Friday -- and 18% for all of last week -- after announcing encouraging financial results for the five weeks ending Oct. 1. The numbers don't sound impressive at first glance. Net sales for the month clocked in at $1.43 billion, 2% below last year's comparable five-week period. Comps fell 3% across all of its brands, and that's pitted against a 1% dip a year earlier. In other words, the average store is ringing up 4% less in sales than it did two years earlier.
However, there was a fire at one of its distribution centers in late August that disrupted operations. Gap claims that the fire at its Fishkill center which destroyed 12 million units of mostly Gap-branded merchandise negatively impacted comparable sales by 3%. These estimates will always be open to debate, but if accepted it would've transformed Gap's negative comps into a flat showing. That's not ideal, but it's not too shabby at a time when many shoppers are turning away from bricks-and-mortar chains for the convenience and often price savings of online apparel specialists.
There was a wide disparity in the performance across Gap's three major brands. Its namesake stores suffered a 10% decline in comps, or a 5% drop if adjusted for the distribution center fire. Banana Republic -- the weakest link at Gap Inc. lately -- followed up last year's 10% slide in September with a 9% decline this time around (or 6% adjusted for the fire's impact). The shining star here is Old Navy, up 4% or 6% growth if we back out the negative fire impact.
Dealing in denim
The market sees this as a relative victory for Gap Inc., and analysts also see it that way. Deutsche Bank analyst Paul Trussell upgraded the stock from Sell to Hold, encouraged by easier sales comparisons that will benefit the retailer in the next few months. Jefferies analyst Randal Konik bumped his price target from $30 to $32, sensing that the downside is fairly limited here as Old Navy continues to improve and Gap's namesake stores are showing signs of bottoming out.
The retailer also points out that margins improved despite the dip in overall comps. It's also warning that the negative impact of the fire will carry into October as well as the seasonally potent holiday quarter.
Not every Wall Street pro is convinced that Gap's on the right track. UBS analyst Michael Binetti stuck to his bearish call and bleak $16 price target, concerned in part by the lingering impact of August's Fishkill fire as well as potential store closings during last week's Hurricane Matthew threat.
Gap shares fell sharply last year, and last week's pop now finds them trading slightly higher for all of 2016. The sustainability of last week's gains will rest on the mall retailer's ability to keep Old Navy moving in the right direction and its namesake brand from slipping too much lower. Banana Republic is a mess, but Gap doesn't have to fire on all cylinders to remain a market winner. Patient investors are being rewarded with a 3.5% yield as they wait for this to play out, and thankfully Gap steps up with sales updates every month.