Is Gap’s Stock a Buy After Earnings?

T = Trends Support the Industry in which the Company Operates

Retail is a very competitive industry, which is further complicated by the global economic slowdown. On Wednesday, the Commerce Department reported a 0.3 percent drop in retail sales last month, compared to a revised 1.3 percent increase in September. October represented the first decline in retail sales since June, and the worst miss of expectations since May 2010. However, unlike J.C. Penney (NYSE:JCP), Gap’s turnaround efforts have been showing positive results.

Last year, Gap announced a recovery plan that included a top designer change and expanding its business overseas, while reducing the number of outlets in the United States. The plan appears to be working. In the third quarter, all three chains reported positive comparable sales in North America. Gap logged a 7 percent gain versus a 6 percent loss a year earlier. Banana Republic and Old Navy also posted increases of 6 percent and 9 percent, compared to losses of 1 percent and 4 percent, respectively. Overall, international comparable sales came in at a loss of 3 percent, but improved from a 10 percent loss last year. Gap’s gross margin also increased to 41.2 percent from 36.7 percent.

Conclusion:

Investors were very pleased with Gap’s latest financial results. Shares of the company jumped more than 3 percent following the report. Year-to-date, Gap has surged 80 percent. Although the quarterly numbers were strong, we find it hard to chase a stock that has outperformed to such a large degree. Furthermore, the retail industry could see a significant slowdown as consumers continue to struggle amid weak economic conditions. Based on the overall picture, we find that shares of Gap are a WAIT and SEE. Investors looking for a clothing retail play may want to consider Gap, but a pullback would make the stock much more interesting.

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