Gap - Good Start Of The Year After A Good News Show

Jan. 7.13 | About: The Gap, (GPS)

Shares of The Gap (GPS) have been off to a good start of the year. The specialty apparel company known for its stores operating under the names of Gap, Old Navy and Banana Republic among others, issued three separate press releases on Thursday which contained good news, helping its shares to end the week higher.

Good News Show

Decent December Sales Report

The good news started on Thursday with the December sales results. Net sales for the five weeks ending on the 29th of December increased by 5% to $2.08 billion. The entire growth in sales was driven by comparable store sales growth.

Comparable store sales growth was driven by Old Navy in the U.S. which reported a 13% increase in comparable store sales. The international activities reported a 6% increase in comparable store sales. Comparable sales at Gap increased by 2%, while comparable sales at Banana Republic increased by a mere 1%.

For the first 48 weeks of 2012, sales came in at $14.52 billion, up 6% on the year before. Again, growth was driven by a 4% increase in comparable sales. CEO and Chairman Glenn Murphy commented on the sales report,

Customers responded favorably to our product offerings and promotions during the holiday season overall. We're pleased to continue delivering positive comps across all our brands in North America.

Acquisition Of Intermix

At the same time, Gap announced the acquisition of Intermix, which is a multi-brand specialty retailer of luxury and contemporary women's apparel. The company operates 32 boutique stores as well as a website offering a mix of luxury brands from known and less well-known designers.

Gap will pay approximately $130 million for the company, thereby extending Gap's portfolio of brands. The acquisition of Athleta in 2008 has been a success and Gap wants to replicate this growth story by acquiring Intermix. No further financial details have been announced.

New Repurchase Authorization

The last piece of good news was the fact that the board of directors of Gap approved a new $1 billion share repurchase plan. The new $1 billion program follows up on the completion of the $1 billion repurchase program in the fourth quarter of 2012. During the fourth quarter, Gap repurchased roughly 17 million shares for a total consideration of approximately $539 million.


Gap ended its third quarter with $1.77 billion in cash, equivalents and short-term investments. The company operates with $1.25 billion in long-term debt, for a net cash position of roughly half a billion.

For the first nine months of 2012, Gap generated revenues of $10.93 billion. The company net earned $784 million for the period, or $1.60 per diluted share. The company is on track to generate annual revenues of almost $15.5 billion on which it could earn approximately $1.07 billion, or between $2.20 and $2.25 per share.

The market values Gap at approximately $15.4 billion after the recent upticks in the share price, which values operating assets at roughly $15 billion. This values the firm at roughly 1.0 times annual revenues and 14 times annual earnings.

Gap currently pays a quarterly dividend of $0.12 per share, for an annual dividend yield of 1.6%

Some Historical Perspective

Shares of Gap have seen a very strong 2012 as the company managed to reverse its negative same store sales results at the end of 2011 into decent positive growth rates. Shares rallied from $18 at the start of 2012 and doubled to highs of $38 during autumn. Shares fell some 15% from that point in time, currently exchanging hands around $32 per share.

Over the past decade, shares have mostly moved in a relative tight $15-$25 trading range, to break out of the range in 2012. In recent years, the company consolidated annual revenues around $14.5 billion, before reporting some noticeable growth in 2012. Earnings hovered around the $1 billion mark, but rose sharply compared to 2011's annual earnings.

The main driver behind the strong share price performance are the sizable and continued share repurchase plans. Over the past four years alone, Gap retired roughly a third of its shares outstanding.

Investment Thesis

Shares of Gap have risen some 3.4% so far in 2013 on the back of the good news show, as described above. Yet shares are still off a far stretch from all time highs set around $50 at the turn of the millennium.

The prospects into 2013 remain good, driven by solid comparable sales growth, selective acquisitions and a continued return of cash to shareholders. Investors and analysts applaud the selective acquisition of Intermix as the company can learn to sell pricier merchandise in its main divisions. The deal will furthermore allow Gap to open more stores in the near future and offer more designer brands.

The latest $1 billion repurchase program is sufficient to retire over 6% of Gap's shares outstanding. The company is able to retire roughly 31 million shares at current prices. If executed at a similar pace as the fourth quarter, Gap could complete the program within six months. As such, Gap could retire approximately 250,000 shares per trading day, roughly 3% of the average traded daily volume over the past month.

With shares having seen quite a correction from 2012's highs, shares might offer an interesting entry opportunity at this time. The valuation at 14 times earnings is fair given the decent same store sales growth. The dividend yield of 1.6% is not high, as Gap prefers to return cash to shareholders by means of sizable share repurchases. Despite the sizable returns of cash to its shareholders, the company still has a strong balance sheet, holding a net cash position of roughly half a billion dollars.

Long-term holders could pick up some shares at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.