On Wednesday, shares of apparel retailer Gap Inc. GPS are popping, up nearly 7% in afternoon trading after the company, which operates the Gap, Banana Republic, Old Navy, and Athleta brands, announced a promising new growth strategy.
Gap is planning on focusing on its two "growth brands": discount juggernaut Old Navy and Lululemon LULU rival Athleta. The company expects net sales of more than $10 billion and $1 billion, respectively, at each of the brands over the next few years, with these gains coming as a result of U.S. store expansion and mobile and e-commerce growth.
"Over the past two years, we've made significant progress evolving how we operate - starting with getting great product into the hands of our customers, more consistently and faster than ever before," said Art Peck, president and CEO.
"With much of this foundation in place, we're now shifting our focus to growth. We will leverage our iconic brands and significant scale to deliver growth by shifting to where our customers are shopping - online, value and active."
Additionally, Gap announced that it will open 270 Old Navy and Athleta stores, while simultaneously closing 200 underperforming Gap and Banana Republic stores over the next three years.
As Gap customers are likely aware, the retailer has steadily increased its online presence across all of its brands, and its online division is one of its most profitable, posting double-digit sales growth. Along with store expansion, Gap will launch a buy online, pick-up in store service, a new personalization engine that is powered by customer data, and "continued significant investment" in its omni-channel services.
Gap hopes these new strategies will create about $500 million in expense savings over the next three years, and the company added that it plans to reinvest a portion of those savings in its growth goals.
Currently, GPS is a #2 (Buy) on the Zacks Rank, and the stock is up just about 2.3% year-to-date.
If you're a value investor, taking a look at Gap may be a good idea, especially now with this new growth strategy in place. Old Navy has always been a huge money maker for the company, and if Gap's better-than-expected second-quarter earnings are any indication, all of the retailer's brands look to be on the upswing.
Right now, Gap's P/E sits at 11.60, falling slightly below the Retail-Apparel and Shoes industry's price-to-earnings of 12.19. Over the past five years, Gap's valuation has cheapened significantly due to overall weakness in the retail industry, but also due to investor and consumer skepticism about the quality of Gap that spiked over that last two years or so. While GPS has stabilized somewhat in the past year, the stock still trades well below the S&P 500.
If Gap can smartly leverage the popularity of Old Navy and Athleta, the company may just be on its way to reaching the icon status it once held before.
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