The CAPS community has turned bearish on apparel retailer Gap
But don't fall out with The Gap. Just to be contrarian, let's make a case that the company has hit the bottom.
The environment is finally turning in Gap's favor, with lower cotton prices and shoppers more willing to spend on candy-colored jeans for spring. More importantly, after several years of stumbling to get the right looks on the racks, it looks as though Gap's various divisions -- Old Navy, Gap, and Banana Republic -- are finally selling something people want to buy.
Thomson Reuters reported that apparel sales rose 8.5% year over year when the books for March were closed this week, better than the nearly 5% it had forecasted. March is an important period for apparel, because that's when stores first get a gauge on how spring fashion is doing. It's also a big sales opportunity, as shoppers buy clothes for Easter.
And Gap's name keeps popping up as analysts look at who would benefit from a stronger apparel market. This week, Caris & Co. upgraded its rating on the stock and set a price target of $32 per share, while Janney Montgomery Scott raised it from "neutral" to "buy," with a price target from $29 to $33, and Piper Jaffray moved it from "neutral" to "overweight," with a target of $33.
The stock is trading near $27 per share lately, at a P/E of 16 to 17, which makes those targets quite doable, if sales continue to perk up and the all-important price of cotton holds. By contrast, Limited Brands
Investors looking at specialty retail are still enamored of lululemon athletica
So the potential is there, but the execution has been lacking in recent years, and the macro trends had not been helping. Gap got clobbered in the past three years by rising cotton prices that were pushing up costs when recession-bound shoppers wouldn't accept rising prices. That kind of top-line pressure made it too difficult to fix bottom-line issues like the debt load, or take on projects to overhaul its brand image or stores. Lower costs will help margins, and rising sales will help -- well, everything.
Thomson Reuters pointed out Gap is finally getting fashion trends right with colored jeans in all its stores, the Diane von Furstenberg's children's line at Gap, and Banana Republic's Mad Men-inspired collection. And the new merchandise is priced right, which is still an issue with the post-recessionary shopper.
Investors tend to put their heads down over the financial statements and can fail to see the big picture: No matter how nice your balance sheet looks, you need to sell a product people want to buy. Now it looks as if Gap has learned its lesson.