Great Expectations For The Gap Ahead Of Earnings Report

| About: The Gap, (GPS)

Location, Location, Location

Gap (NYSE:GPS) is in an interesting position to take advantage of the economic recovery in the U.S. and Japan. The majority of its stores are located inside the U.S. borders and while it is expanding its presence in Asia, most of its stores in the Pacific are in Japan. Its footprint in Europe is limited and concentrated in the U.K. -- nicely avoiding all the turmoil of greater Europe and the EU hullabaloo.

Recent Upgrades Well Deserved

Q1 2013 sales increased 7% compared to Q1 2012; and April 2013 sales increased 5% compared to the prior year. In a historically slow retail quarter, generating an earnings surprise is a strong indicator of success. Accolades piled in:

  • Goldman Sachs raises the price target on Gap from $41 to $46 and maintains a buy rating.
  • Zacks is impressed with GPS hitting a new high and maintains a Zack #2 Rank (Buy). It also comments that "Gap has topped the Zacks Consensus Estimate for the trailing 4 quarters with an average surprise of 2.4%."

In truth, the stellar performance started last year. A look at StreetInsider's Rating History on GPS shows a field of green "Upgrades" sprinkled with "New Coverages" as analysts showed increasing interest in the stock.

Managed By Investors, For Investors

The deeper I dig into Gap, the more impressed I am with its history and current management. It is no surprise to me that the stock is on a run. As an investor, I love transparency and keeping my eye on the numbers. Gap makes it easy for me. Gap understands investors.

While Gap maintains an online business presence on its website, its investor information is shared on a dedicated site here. It is apparent that investor relations is the company's priority.

  • The information is recent. A response to the Bangladesh incident highlights Gap's leadership in Corporate Social Responsibility. The company already invests over $1 million (and have earmarked $22 million) for ensuring fire safety, support, and protection for garment factory workers. The recent incident in Bangladesh did not involve a Gap factory. Zara, H&M, and Wal-Mart (NYSE:WMT) are the ones needing to play catch-up.
  • Real estate is a priority. The company tracks and shares information regarding store count and square footage and maintains data all the way back to 2004 (see "Downloads" section on its investor site). It gives a detailed breakdown regarding the distribution of company stores versus franchise stores. It is possible to track store openings and closings, and changes in distribution of stores across regions. In the next section, I will analyze the information further.

While Donald Fisher, the founder of Gap, passed away in 2009, his family continues to play a role in the business. CEOs hired to run the company may have sold shares in the business but there have been no recent sells from the founding family.

  • Millard Drexler, fired in 2002, cashed out his Gap stock and bagged $350 million.
  • Recently, Glenn Murphy sold 250,000 shares for an average price of $39 and collected over $9.75 million.
  • A query was run on Gap for insider transactions from January 2010 to present. Robert J. Fisher, Director, has been exercising options and making purchases from April 30, 2010 to September 30, 2011. His younger brother, John J. Fisher, 10% owner and director, sold shares between January and March 2010 and has not made any new transactions. Their mother, Doris F. Fisher, co-founder of Gap, sold shares between May 2010 and January 2011. There are no recent transactions reported for her.

Stocks took a dip after Murphy's transactions became news. However, GPS now continues its upward climb. It is reasonable to expect the climb given there is no shakeup in the Fisher family's holdings. Donald and his three sons all had training in Business Administration. In fact, the three children have MBAs and worked in various roles in Gap over the years. In addition, William S. Fisher runs Manzanita Capital, and John J. Fisher is president of Pisces Inc, the family's investment and management office. The detailed setup of Gap Inc.'s investor site along with a close examination of the founding family's education background and stock transaction history gives further confidence to an outside investor like myself to go long on the stock.

Understanding the Correlation of Real Estate with Future Growth

As part of its mandate for a turnaround, Gap has been closing unprofitable stores and opening new stores in select locations. Of note:

  • Between Q1 2012 and Q4 2012, 38 U.S. Gap stores were closed and an additional 6 were open in Canada. Overall, the number of North American Gap stores were down from 1022 to 990 (down 32).
  • In Europe during this time, 6 Gap stores were added to the U.K., while the other numbers were kept constant (without any further expansions, Gap stores in France numbered 37; in Ireland, 3; and in Italy, 10). Gap Europe gained 6 stores during this time, and all in the U.K.
  • In Asia, Japan saw 4 more Gap stores, and China 26 -- bringing the total up to 191 (up from 161, a total increase of 30 stores).
  • Athleta stores expanded their U.S. presence to compete with Lululemon (NASDAQ:LULU). It went from 11 to 35 stores, growing by 24 stores.
  • Piperlime started as an online shoe store and in Q3 2012, sprouted a store front in NYC.

The following chart generated using the company's February 2, 2013 data shows further confirmation that Gap is poised for growth. The company does over 78% of its business in the U.S. and 7.5% in Asia. It obviously knows how to cut losses and close stores and open others as needed.

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The "Alpha" Babies and Their Baby Boomer Mommies

In recent years, Gap has been developing specialty stores. The babies are 3: Athleta, Piperlime, and Intermix. While currently accounting for a drop in the revenue bucket, they are an interesting source of future growth as they appeal to the market with the most disposable cash. According to She-conomy.com, women account for 85% of consumer purchases and 22% shop online at least once a day. And over the next decade, they will control two thirds of consumer wealth in the United States. With longevity in their cards, they are expected to inherit a double windfall -- from parents and husband.

Given such positive statistics completely in favor of the 50 plus female, Gap's new-ish brands are definitely geared for new real estate. Perhaps, in future the Banana Republic stores and Old Navy Stores (which have seen relatively flat growth) will be replaced by more yoga clothing stores; footwear and handbag stores selling assorted designer brands; and luxury boutiques selling assorted designer clothes.

In a Parallel Universe, Across the Border in Canada

While researching GPS, I am reminded of George Weston (OTCPK:WNGRF) and Loblaw Companies (OTCPK:LBLCF). While bakeries and grocery stores are their bread and butter, they are also very mindful of real estate and the fashion industry. Holt Renfrew is owned by Selfridges Group and its chairman is W. Galen Weston. The Weston family shares much in common with the Fisher family: they are both dynasties with exceptional education and expertise interested in using their knowledge to manage risk and fuel future growth in retail. Over the years, the stocks have fallen only to rise again -- and dividends steadily increased.

Disclosure: I am long GPS, NOK, BBRY, HIMX. 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.