What: Shares of retailer Gap (NYSE:GPS), best known for its namesake brand as well as Old Navy and Banana Republic, retreated $0.32 on Tuesday to close at $40.78. The decline followed a downgrade from research firm Mizuho Securities after the company updated its fourth-quarter results and issued its January sales totals.
So what: Gap's fourth-quarter sales results produced sales growth of 3% to $4.71 billion, while the company raised its full-year EPS guidance to the fresh range of $2.86-$2.87 from prior guidance of $2.73-$2.78 per share. Unfortunately, it also announced that net sales in January dipped 1% with same-store sales dropping 3%. (Same-store sales only consider stores open for at least 12 months for apples-to-apples comparison purposes.) Wall Street had been expecting a more modest 1% January decline in same-store sales.
Following this release, Mizuho's covering analyst Betty Chen downgraded Gap to "neutral" (the equivalent of a hold) from "buy" and marginally dropped her firms' price target on the retailer to $43 from $45.
The impetus for the downgrade is the expectation that Gap will face a number of margin challenges in 2015. These include the expected negative impact of foreign currency translation, tough year-over-year same-store sales comparisons for Old Navy in the latter-half of 2015, and delayed improvements at its namesake Gap brand stores due to recent management changes in the marketing and merchandising department.
Now what: The question now is whether or not Mizuho's pessimism on Gap is warranted. In other words, should you avoid buying Gap in 2015?
On one hand there are distinct positives to be had by owning Gap stock. The company received 76% of its revenue from the U.S. in Q3 2014, meaning it has the opportunity to really ramp up growth by hitting overseas markets. For example, sales in Asia grew to $368 million from $339 in Q3 on a year-over-year basis. Regions like Asia offer superior growth prospects compared to the United States for a well-known brand such as Gap and could be a significant boost to its bottom-line.
But, Gap's big growth prospects are also its downfall. In the U.S. Gap has struggled to reignite excitement for its flagship brand. Growth in its Old Navy segment has been generally inconsistent for years which hasn't allowed the company to gain much traction. What it's forced investors to do is decide if they want to buy into a company that's quadrupled in value since the recession but is probably growing on an organic basis at just 1%-2% annually. Frankly that's just not a very appealing picture if you ask me, even with a 2.2% dividend yield, according to S&P Capital IQ.
So to answer the original question, I would suggest looking elsewhere than Gap if you're after growth and value in the retail sector.