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Three Simple Reasons to Buy This Retailer

Monday - 1/7/2013, 3:57pm  ET

Back in 2011, no one would have pegged clothing retailer The Gap  as a growth stock. The company’s product lines were becoming stale, sales growth was sluggish and the stock had gone nowhere for a decade. Gap was fading into the past as an icon of the 1990s and its omnipresent stores, peppered all over malls and outlets in America, deflated its brand appeal.

Then out of the blue, cost-cutting initiatives, acquisitions and international expansion began paying off. 2012 would be a year to remember for San Francisco, California-based Gap Inc.

Shares surged more than 70% by the end of the year, outperforming all of its industry peers:

GPS data by YCharts

After that kind of rally, there are likely only two questions on investors’ minds right now:

  • Can Gap continue to rally into 2013 despite macro problems at home and abroad?

  • Should I buy shares now or wait for a pullback?

In my opinion, Gap is still fundamentally cheap. Let’s see how it measures up to five of its retail competitors - American Eagle Outfitters , Aeropostale , Abercrombie & Fitch , Nordstrom and Ralph Lauren.

Company

Trailing P/E

Forward P/E

5-year PEG Ratio

Return on Equity

Gap Inc.

15.7

12.5

1.6

24.4

American Eagle Outfitters

21.6

13.2

1.1

11.0

Aeropostale

12.1

17.4

1.4

16.5

Abercrombie & Fitch

36.7

13.4

0.9

6.8

Nordstrom

16.7

13.8

1.3

34.4

Ralph Lauren

22.5

17.6

1.5

19.6

BEST VALUE:

Aeropostale

Gap

Abercrombie & Fitch

Gap


Gap still tops its competitors in forward P/E and Return on Equity (with the exception of Nordstrom), which means the stock's best days may still be ahead. 

Here are three simple reasons I think Gap is a top retail stock for 2013.

Reason 1: Strong Comparable-Store Sales Growth

Investors were impressed by Gap’s strong comparable same-store sales growth, which measures sales growth at stores open for over a year. The company attributed its robust results to successful holiday promotions and increased discretionary spending in North America. Comparables and net sales both rose 5%, a marked improvement over the previous year.

(North America)

Comp Growth

Net Sales Growth

December 2012

+5%

$2.08 billion

December 2011

+4%

$1.98 billion


Gap has now posted six consecutive quarters of comparables growth. This was the primary catalyst for the stock’s unprecedented 70% rally in 2012.

Gap operates three flagship brands - a common sight in malls across North America - Old Navy, Gap and Banana Republic. Old Navy is its lower-end retailer, Gap’s namesake stores offer mid-range apparel, while Banana Republic sells higher-end apparel for young professionals.

A quick look comparing Gap’s three flagship brands reveals a preference for cheaper apparel over the holiday season. All three segments reported positive growth, with Old Navy emerging as a clear growth leader.

(North America)

December 2012 Comp Growth

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