Retail giant Gap (NYSE:GPS) has been making several strides as of late. In a bid to further expand its operations in Asia, the company plans to open a series of stores in notable cities throughout the continent. Approximately 110 namesake stores will be opened throughout China by the end of the year plus another 40 in India alone. This not only indicates the company's financial strength but also it's potential to develop new customer base in emerging markets.
Second quarter reports saw the company beat out investor expectations. Though Gap reported lower gross margins during the second quarter it did, however, reduce its operating expenditure which enabled the company to significantly increase net profitability.
Gap Profit and Same Store Sales
Thanks to strong sales of its reliable Old Navy brand, the San Francisco-based retailer reported a YOY revenue increase of 3% or approximately $4 billion in the last quarter. Operating expenses plummeted $1 billion or 4.4% as a result of low marketing budget. Despite that the company saw a 9.6% YOY increase in net income which clocked in at $332 million. The stats essentially indicate that the retail juggernaut has bested estimates 8 quarters in a row.
Same-store sales continued to remain non-responsive during the second quarter, which previously stood at 5% in the same quarter one year ago. Moreover, the company's SSS plunged by 5% internationally as compared to a 6% growth visible in the same quarter a year ago.
Old Navy continues to remain a trusted brand and a reliable source of cash for the retailer. Sales from Gap's Old Navy wing increased 4% globally. Thought it's a 2% decrease from the same quarter one year ago, sales are expected to rise in the upcoming quarters with the introduction of the fall collection.
Sales of Banana Republic - another globally known brand - remained flat mainly due to reduction in consumer spending in various American cities.
Gap's Expansion in China and India
As previously mentioned Gap plans to expand its outlets in Greater Chinese region; elevating its presence by another 110 stores by the end of the fiscal. However, that's not the only growth strategy the company is eyeing. In collaboration with Arvind Lifestyle Brand Limited - a subsidiary of textile giants Arvind Limited - Gap plans to open 40 franchise operated namesake stores in India starting from two of the biggest cities in the country - Mumbai and Delhi.
The expansion comes on the back of tougher competition and a reduction in consumer spending in the North American continent. The company at one point generated 84% of its overall revenue from the US alone and only 9% from various Asian cities. With the expansion in Asia, the company is looking to evenly distribute sales potential globally and to specifically counter loss of revenue in the US.
Collaboration with Arvind Limited will allow Gap to reduce the cost of building an operational base in one of the biggest economies of the world. Speaking about the expansion in India Global President of Gap - Steve Sunnucks - stated that "India is an emerging, vibrant market and an important next step in our global expansion strategy." VP of Global Franchise Ismail Seyis added, "More than half of India's population is under 25 and they are actively embracing fashion in today's retail environment."
Why Gap is a Buy
Gap's noteworthy strengths in some key financial areas make it a worthy investment. The company currently enjoys a solid financial position with reasonable debt levels, impressive revenue growth and return on equity, strong operational cash flows and rising profit margins.
Expansion in India particularly is expected to take the company to new heights in the retail sector. Gap is among the few American casual apparel brands that are widely recognized in India. In addition, the company has been sourcing goods from India since the past several decades which makes it a familiar name with the local population. Furthermore, apparel market is anticipated to reach $120 billion in the country by the year 2020, and Gap, with its 40-store expansion plan would be eyeing to take a big chunk of that slice. Large populations of urban Indian youth, not to mention a growing number of females getting employment in big cities want a trend setting casual clothing brand that can match their new lifestyle and Gap can certainly fill that gap.
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