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Why Gap’s CEO Is Projecting Optimism after 4Q16

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Gap returns to growth after two years

Gap (GPS) reported total revenues of ~$4.4 billion in 4Q16, beating the consensus by $40 million. The company returned to growth after nine consecutive quarters of revenue decline. For fiscal 2016, Gap’s total sales fell 1.8% to $15.5 billion. Foreign exchange translations negatively impacted the year’s sales by around $20 million. 

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The Old Navy drive

Gap’s comparable store sales were up 2% during the quarter as compared to a 7% fall during 4Q15. Its sales comps turned positive for the first time since 4Q14.

Of the three core brands, Old Navy emerged as the strongest, growing 5%, versus an 8% decline last year. Gap Global was flat, while Banana Republic plummeted 3% during the quarter. For fiscal 2016, Old Navy grew 1%, while Gap Global and Banana Republic plunged 3% and 7%, respectively.

Art Peck, Gap’s CEO (chief executive officer), stated the following during the fourth quarter conference call: “We’re pleased to finish the year strong, with positive comp and sales growth during the critical holiday quarter.”

More management confidence

After two years of decline, Gap’s management expects sales comps to show some improvement in fiscal 2017. Comps are expected to stay flat or turn slightly positive next year.

This comes as a great relief for the management. Giving a strong statement about the company’s future, Peck state that “dead, dying, sick…We are none of those,” adding that the company is “healthy and strong” and has a “plan and clear direction.”

How is the apparel sector doing?

Persistent competition, deflationary headwinds, and retail bankruptcies have put pressure on the US apparel industry in general. Peers Under Armour (UAA), Hanesbrands (HBI), and Michael Kors (KORS) reported softening of sales, especially in the North American market, and have recently missed top-line forecasts.

Notably, investors interested in exposure to Gap through ETFs might consider the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY), which invests 2% of its holdings in Gap.

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