This Stock Is Looking Dapper

07/26/2012 11:45 am EST

Focus: STOCKS

David Fried

Editor, The Buyback Letter

This clothing retailer has had a great year, and from all appearances it is poised to keep the good times rolling, writes David Fried of The Buyback Letter.

Clothing giant Gap (GPS) is one of the world's largest specialty retailers, with some 3,200 stores in 39 countries.

Founded in 1969 and based in San Francisco, the company has five of the most recognized apparel brands in the world—Gap, Banana Republic, Old Navy, Piperlime, and Athleta. The company is focusing on growing internationally and gaining market share at home by offering items at lower prices and improving its merchandise selection.

Sales in Asia account for 8% of their total revenue and grew at a 12% rate in 2011 year-over-year, to $1.18 billion. They have a strong presence in Japan with 150 stores, and are seeking to expand their China presence to 45 stores from 15 by 2014. Revenue per square foot in Asia is a respectable $784.

Interestingly, Banana Republic, part of Gap, is partnering with Bon Appetit magazine to promote a new apparel collection called Desk to Dinner, in one of the first collaborations between food and clothing companies.

Banana Republic is known for collaborating with partners for clothing collections as it did in its successful lines of apparel inspired by the AMC television series Mad Men. And the retailer has previously joined with fashion magazines for promotions.

The Gap, along with other clothing retailers, has struggled in the last few years, but under the leadership of new CEO Glen Murphy, the stock is up nearly 50% over last year.

First-quarter results looked good. Gap increased revenue by 6% in Q1 2011, pulling down $3.5 billion this year.

Showing overall corporate strength, the Banana Republic and Old Navy sub-brands increased revenue as well. The two biggest players were the Gap brand and Old Navy, whose divisions combined to account for 77% of total Gap revenue in the first quarter.

In addition, the higher-margin direct-to-customer channel grew 15%. Direct sales brought in $110 million for the Gap brand, representing 8% of total Gap brand revenue. Across the entire company, direct-to-customer sales grew 18% compared to 2011, which helped increase gross margins to 39% in Q1.

The stock has performed spectacularly in 2012, on the strength of a structural refit of the company’s business model in terms of square footage, store closing, and improving comps, and was up 36.2% on the year through June 1. Management has reduced shares outstanding by 11.1% in the last 12 months.

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