There are a few companies that I always think of as having saturated their markets that then go on to grow even larger. Over the last 12 months, Gap (GPS +3.60%) has continued to impress, growing sales and driving the stock steadily up. The company has beaten the S&P 500 so far this year, and a strong showing in October gave it a boost early this month. With that all behind it, Gap is now looking forward to the holiday season, in an attempt to avoid the fate that seems to be waiting for most of the retail world -- compressed margins and promotions out the backdoor.
Gap tries to keep the momentum
In October, Gap increased comparable global sales by 4%, with all of its brands posting increases. That was an excellent result, especially since the Banana Republic brand had been falling over the past few periods. For the quarter -- which will be officially released tomorrow -- Gap is expecting to see an 11% to 12% increase in earnings per share. Excellent. Now what is it going to do with all that goodness?
First of all, Gap is in the same boat as everyone else this holiday season. Retailers that have reported recently have all put their worst foot forward for the holidays. Urban Outfitters (URBN +6.77%), for instance, warned that the holidays could be overly promotional, damaging fourth-quarter margins. In order to fight that, retailers need to offer interesting promos and unique merchandise.
The big sales plan
In order to help it stand out, Gap is offering some in-store promotions that should help get folks through the door without having to discount merchandise too deeply. At Banana Republic, for instance, the company is planning eight days of specials, including product giveaways and a chance for shoppers to win paid vacations. Old Navy is offering a similar program, hoping customers will come in for a chance to win $1 million.
The idea is similar to a plan that Kohl's (KSS +1.36%) is offering this year, where random shoppers in each store will have their whole purchase paid for. The retailer has also forecast a soft holiday season, with sales pulling back due to consumers' concerns about overspending.
Offering customers the chance to win big is an excellent alternative to heavy promotional sales. In the first place, it doesn't cut into margins in nearly the same way, with the cost of each promotion being so small. Second, it offers customers a unique reason to come into the store. Instead of just bargain-hunting or price-matching, customers come in to try to win.
Gap's third quarter
Gap is announcing its third-quarter results tomorrow, and the associated conference call should offer some more insight into the company's holiday plans and expectations. I imagine that, even with an optimistic view of its own momentum, management will be realistic about the difficulty of having a blowout sales season.
For investors, most of Gap's third quarter is already baked into the stock, as the company's October update included an updated forecast for the entire quarter. However, an optimistic or pessimistic view of the end of the year will likely have an effect on shares, and I wouldn't be surprised to see a good third quarter pulled down by a cautious fourth-quarter outlook. In any event, check back with The Motley Fool for a detailed analysis once the announcement is made.
