The Gap Is Consistently Outpacing the Industry

It's no secret that US fashion retailers have been struggling lately. Consumers, left with less money to spend, are reluctant to open up their wallets. Teens especially are feeling the pinch. For many fashion retailers, the teen market is an extremely important one and failing to capitalize on this demographic can cost a company dearly. One fashion retailer that has been managing to do well in this tough environment is the Gap , easily outpacing competitors such as American Eagle and Abercrombie & Fitch . How is the company pulling it off?

Solid comps
The Gap, contrary to most of its peers, has a very solid earnings history. The company hasn't missed a quarterly report since at least the first quarter of 2011. Despite a bit of a dip in 2012, annual earnings per share have increased from $1.12 in 2008 to $2.33 in 2013, with analysts expecting $2.71 for fiscal 2014.

The company's October sales figures were formidable, easily beating analyst expectations. Preliminary numbers for the quarter ended November 2 showed a 3% net sales increase. Even better, comp store sales increased 4%, thrashing expectations for a 0.6% rise .

Final third quarter earnings are due on November 21, but the company has already given a very upbeat profit forecast. It now expects earnings of $0.70-$0.71 per share, which easily tops the $0.66 consensus. The news sent shares soaring 9% in Friday's trade. By division, the company's Gap global division led the way with a 5% sales increase, followed by Old Navy with a 2% rise and Banana Republic with a 1% increase .

To boost sales in the current weak spending environment, the Gap has been working on revamping its image somewhat. It's now offering more brightly colored clothing, which includes a line of colored jeans. These so far seem to have been met with approval from teens. Additionally, the company has been working on making its stores livelier, and is also ramping up its designer collaborations .

Trouncing the competition
The Gap's figures are especially good when compared to those of its competitors. Abercrombie & Fitch recently came out with some fairly dismal numbers. Third-quarter comps were down 14% and the company expects another drop next quarter. According to management, the company isn't doing a good enough job in adjusting to shifting fashion trends. Additionally, the company might have too many stores. Some analysts believe that ANF, like the Gap previously did, should work on closing stores and overhauling its product lines .

American Eagle has been doing a little better, but not by much. Third quarter sales were down 6% year-over-year to $857 million. Comp sales were down 5%, compared to a 10% rise for the same period last year. The company has been having a tough time this year, with second quarter EPS dropping some 52% year-over-year. There was some good news in its latest release though as the company upped its third quarter EPS guidance to $0.19 from $0.14-$0.16. Again, the company doesn't seem to be doing as good a job as the Gap in adjusting to a shifting fashion market.

The bottom line
The Gap has done it again, blowing away analyst expectations for comp store sales as well as EPS. The company seems to be doing a lot better than the competition in dealing with a changing fashion retail market, especially in terms of how it appeals to teen shoppers. Beating expectations and raising guidance is no small feat for a fashion retailer in the current spending environment, and this is a testament to the company's solid management and execution.

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