After the market closed yesterday, Gap (GPS 1.32%) announced its April sales and released a forecast for its first-quarter earnings. Comparable sales in April were up 7% this year, although investors should keep in mind that Easter was in March this year and April in 2012. Looking at the broader picture, first-quarter comparable sales were up 2%, with Gap and Old Navy both posting a 3% increase and Banana Republic coming in flat.
Investors were excited about the company's forecast earnings per share, which Gap estimated at between $0.68 and $0.69. Up to this point, analysts had anticipated $0.57 per share. The stock was up more than 5% by midday today.
A growth trend for Gap
Even though Gap's quarterly comparable sales growth trend was down compared to last year, it's still a great trend for the company. The overall trend continues to be one of growth, and the quarterly gains that Gap has managed this year on top of the gains it saw last year indicates that the recovery plan -- which was the undertaking this time last year -- has successfully translated into a new growth plan.
The growth plan contains two big initiatives -- international expansion and secondary brand growth. Specifically, the company has called out Gap China, Old Navy Japan, and Athleta as being big focuses over the course of the year.
International expansion
Gap China opened more than 30 stores last year, supported by a heavy marketing push. As CEO Glenn Murphy said on the company's annual earnings call, "If you don't build a brand in China, you are not going to make it." This year, that branding is going to drive the addition of 35 more Gap China locations.
In addition to China, Gap is going to be pushing its Old Navy brand in Japan. Last year, Gap added online stores for Gap and Banana Republic in Japan, but the focus is still on Old Navy. The brand is going to get 15 to 20 new stores this year. One issue for the Old Navy push that investors should watch out for is the weak yen. Gap has built some weakness into its forecasts, but even since the end of last year, the yen has fallen sharply.
All of this good news works best if you ignore that Gap has to compete with all sorts of companies for its customers. As Murphy also pointed out, without good marketing, China has "too many new entrants, too much competition." Guess? has had some success in China and South Korea recently, and last quarter China revenue jumped close to 30%.
Athleta's potential
Apart from the international expansion, Gap is going to focus on expanding its Athleta yogawear line. Last year, the company more than tripled its total store count, from 10 to 35. In 2013, it plans to almost double that number, adding 30 more stores by the end of the year. Of course, Athleta is sitting in second place -- at best -- behind lululemon athletica (LULU 3.66%). Lululemon has more than 200 locations, and comparable-store sales are running in the high single digits, even with the company's sourcing problems.
Even with the competition and international challenges, Gap seems well poised to take advantage of the plan that it's laid out. The last pitfall that investors need to watch out for is the problem of multitasking. Gap has a lot of irons in the fire, and other companies have had issues keeping the core in mind as they expand secondary lines and locations. I think management can handle it, and I'm expecting more good things from Gap this year.
