J.P. Morgan Reports The Gap Comps Remain At The Bottom Of The Pecking Order

In a report published by J.P. Morgan, The Gap's GPS comps remain at the bottom of the pecking order despite new management.

J.P. Morgan said that rising consumer confidence, pent-up demand from the January snowstorms and more favorable weather helped drive upside to most retailers in February – with The Gap being one of the rare exceptions. “Comps for the month (which now include DTC) declined 3% driven by -4% comps at Old Navy and BR, while Gap posted a 1% comp decline. Newly appointed Gap President, Art Peck, is attempting to improve the brands relevance in 2011, but time is clearly of the essence. That said, this was a disappointing month for the company as a whole, but on a positive note 1) comps accelerated in the back-half of the month and 2) Old Navy shifted its “fundamental sale” from the end of February LY to the beginning of March, which could help offset some of the negative impact from this year's Easter shift. Putting a disappointing month aside, shrinking domestically in combination with growth internationally (online/franchise/stores) is the key to the “bull case” taking place at GPS. The franchise business could grow 55-60% this year to $300 million while we expect direct sales to grow 10-15%. Also, given the company's sizeable cash position (~$1.5 billion) and its commitment to returning cash to shareholders (returned 100% of FCF, or $10 billion since 2004), including a new $2 billion buyback program and 13% dividend increase, shares should continue to benefit from ~$1 billion in annual repurchase activity helping drive above-average ROIC of 35%. We note that the company maintains a 2% dividend yield and 10% FCF yield, which should minimize downside risk from the low $20s.”

The Gap closed yesterday at $22.20.