Earnings Preview: Higher Profits Forecast for Gap and Limited Brands
Limited was hit badly early in the recession, as shoppers turned away from frivolity and focused spending on necessities. It reacted by sharpening its merchandising to reflect the market: Victoria's Secret stocked up on basic underwear and lowered some opening price points, while stepping back from high-priced "glamour" items.
Back To The Basics
Meanwhile, its Bath & Body Works line stressed practical items such as antibacterial lines during flu season and special gift items for the holidays. As a result, sales have begun to recover at Victoria's Secret and both chains had better-than-expected sales during the holidays.
Analysts will likely have some questions about when sales growth will return in earnest. Limited has forecast February sales will be flat, in line with many predictions of disappointing sales this Valentine's Day.
Gap is also poised to show some sales growth, but it will likely be more modest, since its Old Navy chain held up better than most apparel stores during the downturn. The flagship Gap chain reacted by going back to basics -- t-shirts and denim -- with some success, while Banana Republic has lagged.
More Aggressive Marketing
Analysts expect Gap to post earnings for 49 cents for the fourth quarter, a 44.1% increase from the same period a year ago. It already posted healthy numbers in the third quarter, including its best operating profit in 10 years.
Those gains emboldened the company to launch more aggressive marketing efforts in a bid for market share. The initiatives, including a splashy holiday TV campaign for The Gap, created some concern among analysts that the company may be poised to increase its costs. Morgan Stanley downgraded Gap just ahead of the earnings report, saying it expects the retailer's margins to drop along with sales in 2010.
Investors will want some reassurance that Gap is not getting overconfident and will continue to control costs, even if sales improve. With Old Navy sailing along and Gap having undergone some retooling, analysts will want more details on plans to overhaul Banana Republic. That will include a progress report on the prototype stores opened in October and plans to expand them.
Getting Over A Sales Funk
Limited, which took a worse beating early in the recession, is seen by investors as having more upside potential. UBS initiated coverage on Limited days before the earnings report with a buy recommendation and a target price of $25 per share; it's been trading in the low- to mid-$21 range recently.
Specialty apparel companies broke out of their sales funk during the holidays and are attracting more investor interest. Just a week before the retail earnings season kicked off, Express, an offshoot of Limited Brands, filed papers for an initial public offering.
As the two leaders of the mall report results, investors will be watching them to see that controlling costs and growing sales are not a passing fad.