Gap Stock Is At All-Decade Highs


The world of fashion retail is as fickle as fashion itself, and Gap knows all too well just how painful it can be to fall out of style. However, the company has succeeded, after a long-fought battle, to restructure and turn its business around. Now, the enviable question that long-term investors face is whether the move that has sent Gap stock to double since early 2012 is poised to continue.

Gap is well-known for its namesake retail stores, but the company also counts the popular Old Navy and Banana Republic store chains under its corporate umbrella. More recently, its move into athletic apparel has helped it diversify its offerings, and appeal to a new customer demographic. Let's take a closer look at how Gap turned things around, and what's in store for the retailer's future.

Where the earnings were
A look at Gap's recent results should explain the stock's strong performance recently. At the end of February, Gap reported a 5% increase in same-store sales, and an overall jump in earnings per share by almost 50%. The company made a number of strategic moves, the most important of which was to re-emphasize its core Gap brand. In the past, Gap had become almost an afterthought and, although having the bargain-conscious Old Navy in the mix was useful during the recession, it didn't give the company as much exposure to the ensuing economic recovery as it deserved. By reiterating the division between Gap and Old Navy, and avoiding heavy-discount activity, the company wooed back customers who wanted the original brand's products.

Other important moves included creating the Intermix high-end retail concept to Gap's brand stable, giving it exposure to the highly successful retail niche that Michael Kors has exploited so well since its late-2011 stock IPO, and expanding on its Athleta athletic-store chain. The latter concept proved especially timely when lululemon athletica and its stock suffered its infamous sheer-yoga-pant recall, as Gap had the opportunity to take advantage of the momentary lapse in lululemon's quality control to try to win customers over.

What's in Gap's future?
Gap hasn't been content with its turnaround gains, however. Earlier this month, Gap revealed plans to boost its Latin American presence, with new stores in Mexico and Paraguay adding to an eight-nation presence in the region. With an international presence of 300 franchised stores, all opened since 2006, Gap has moved quickly to capitalize on its brand awareness around the world.

It's important not to underestimate the difficulty of the task at hand for Gap, however. Even with its gains, margins at Gap lag well below those of lululemon and Michael Kors:

GPS Profit Margin Quarterly Chart
GPS Profit Margin Quarterly Chart

Retailer Profit Margin Quarterly data by YCharts.

One other challenge facing Gap is getting good workers. The retail industry represented a big portion of the overall job openings in the government's April report, showing just how strong the demand for high-quality labor is right now. Given Gap's expansion plans, the company will need to fill its share of those openings with the best people it can find.

Are record-highs ahead?
Gap stock still needs to see further gains if it wants to reach all-time record levels. But with its turnaround in place, and investors full of confidence, new highs are within Gap's reach for the first time in a long time.

Gap's efforts notwithstanding, Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail. But with all that growth, has Kors stock finally become too expensive, or is there still room left to run? The Motley Fool's premium report on Michael Kors gives investors all the information they need to make the right decision, covering the must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Lululemon Athletica. 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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