Gap (GPS): Stores Look Cool, But Not Much Upside

Considering the lousy retailing environment, FBR is pleased with the Gap’s Q2 results (GPS). But the Gap’s turnaround story is now taken consensus, and FBR sees only 5% upside for the stock.

The firm believes GPS’s current turnaround effort should prove to be successful because the company remains focused on the fundamentals, including:

  • inventory control
  • margin enhancement
  • cost containment
  • free cash flow generation
  • returning shareholder value through buybacks and dividends
  • improving financial metrics, including sales productivity and ROIC.

GPS increased its FY08 free cash flow guidance up to $1 billion, and FBR expects Gap to continue to be very aggressive in its repurchase activity, given that it has limited other uses for its surplus cash.

FBR is also encouraged by Gap’s focus on “nailing”: 1) the right product, 2) the right look for the stores, 3) the right presentation, and 4) the right marketing message as part of its long-term goal to drive traffic.

However, for those looking to make a play on retail as the expectations are low, GPS might not be the most attractive option. The stock is only $2 off its 52-week high now and is up about 1/3 off its 52-week low. And even bullish FBR only sees about 5% upside.

FBR reiterates OUTPERFORM on Gap (GPS), target $21.

Quarter: Gap (GPS) reported Q2 upside on EPS ($0.32 vs. $0.30 consensus) and roughly in-line revenue ($3.5 billion vs. $3.52 billion consensus). The company also reiterated its previous FY08 guidance of $1.30 to $1.35 versus the Street at $1.34.

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