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Has Gap’s Top Line Started Showing Signs of Strength?

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Gap’s top line has tempered over the last two to three years

Gap (GPS) has witnessed a slowdown in sales over the last two to three years. Total revenue, which expanded 8% in fiscal 2013, rose 3% in fiscal 2014 and 2% in fiscal 2015. Performance in the first nine months of 2016 has been even worse, as the top line receded 2.8%.

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What’s behind the decline?

The reason for this decline has been the continuous weakness in the company’s core brands: Gap Global and Banana Republic. Gap Global’s sales comps have fallen in the past 11 quarters, while Banana Republic has seen seven consecutive quarters of negative comps. In the first three quarters of 2016, comps of Gap Global and Banana Republic were down at an average of 4.7% and 9.3%, respectively.

Old Navy: Gap’s lone bright spot

Old Navy, Gap’s largest revenue-generating segment, has been the company’s only business that has seen growth in 2016. After declining by 6% in 1Q16, sale comps remained flat in the second quarter and grew 3% in the next quarter. The company’s management attributed this resurgence to the brand’s altered product pipeline and assortment.

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4Q16 brings some respite

The company recently reported its January and fourth quarter sales. Results were better than expected. 4Q16 net sales rose 1% YoY to $4.43 billion, beating the consensus estimates of $4.39 billion. Gap Global comps remained flat, while the Banana Republic segment reported the slowest decline in comps, falling 3% during the quarter. Old Navy continued with its robust performance and recorded a 5% jump.

How is the apparel sector doing?

The apparel sector has been under pressure during 2016, mainly because of rising competition, deflationary headwinds, and retail bankruptcies. Players like Under Armour (UAA), Hanesbrands (HBI), and Michael Kors (KORS), which reported results recently, missed top-line estimates on account of the above-mentioned headwinds.

Investors who want to invest in Gap through ETFs can consider the iShares Morningstar Mid-Cap Value ETF (JKI), which invests 0.35% of its holdings in Gap.

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