Gap Gets Cheaper, but Stays Strong
Warren Buffett has a nice outlook on life -- the cash helps. He once pointed out that we have an odd reaction to the price of stocks that we like. When they go down, we get upset. If it were the price of anything else -- Buffett suggests hamburgers -- we'd be happy. I try to apply that little token of wisdom as often as possible. So when Gap got hit today due to poor results, I wasn't upset; I was happy to be able to get more Gap for my dollar.
Gap misses estimates
The biggest pull that Gap felt today came from a miss in comparable-sales growth in July. The company posted a 1% year-over-year increase, and the market was looking for 1.6%. That's not going to be the end of the world, and I don't think it's a signal that anything is wrong at the retailer. The slower growth came mainly from the company's Old Navy brand, which was comparing against a very strong July 2012 result.
For the quarter, Old Navy still managed a 6% increase in year-over-year comparable sales, putting it in a great position for the rest of the year. In fact, on a quarterly basis, it was Banana Republic that suffered the most. The brand had a 1% decrease in comparable sales.
The company reported that July clearance had gone slower than it anticipated, but that strength in May and June made up for those softer sales. As a result, the company was expecting to beat analysts' expectations for earnings per share, coming in at between $0.62 and $0.64 against an expectation of $0.59.
Even with the slight comparable-sales miss, Gap still looks well set for the rest of the year. The earnings estimate for the quarter was a nice surprise, and the business is about to enter its first back-to-school season since its turnaround really took hold.
Some analysts have worried about this year's back-to-school sales, as both Aeropostale and American Eagle have issued earnings warnings for their second quarters. The businesses cited weak sales and falling margins as the issues, but there is no reason to suspect that the blight will infect Gap. In fact, weaker sales at its competitors could set it up for an even better end of the summer.
Gap is in the process of taking market share back from other teen retailers, which will help it when fall trends affect young minds. My main concern now is that the business needs to find a way to differentiate its Banana Republic brand from companies like J. Crew. The weak business at Banana is likely indicative of it not having a very strong voice in the fashion marketplace. Continued weakness could start to weigh on earnings.
With that issue aside, Gap looks like it's well poised to have a fine rest of the year, as it continues to build momentum. An increase in earnings and cash flow would be welcome in the second half of 2013, and would give Gap the resources it needs to expand some of its secondary lines.
Exercise brand Athleta has been strong, but there's more that can be done with Piperlime and Intermix. Additional cash and time will help Gap make those changes. For now, I see the fallback as a great opportunity, and I'm looking forward to what Gap has to offer as 2013 starts to wind down.
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The article Gap Gets Cheaper, but Stays Strong originally appeared on Fool.com.Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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