It looked like a long, skinny snake. And I was headed straight at it. I wasn’t scared … just surprised.
That’s how I felt this past weekend.
My wife and I were out to do some shopping … you know, “for the kids.”
After stepping into Old Navy, the thing that caught my eye was the people. The line of humanity at the trinket-filled checkout area was more than it could handle.
They wrapped around like a sinewy snake. Feet extended into the shopping area … the attached arms full of well-priced stuff.
When it was our turn to pay (i.e., wait), I couldn’t help but think about how quickly sentiment changes.
Retail stock prices had been struggling. The SPDR S&P Retail ETF (NYSE: XRT) fell 25% over two years to its recent August 2017 low. Didn’t many believe Amazon was going to put every retailer out of business?
My eyes tell me it’s game on. That’s a good thing for one stock…
The Trend Is Our Friend
The Gap Inc. (NYSE: GPS) owns Old Navy … and other well-known retailers. The list includes the eponymous Gap stores, stylish Banana Republic and female-focused Athleta. Its shares should rise 20% this year if management achieves its goals.
The trend is in the company’s favor.
Did you know sales at stores like Gap that sell clothing or shoes have been up each year since 2009? (This does not include department or other general merchandise stores.)
And January’s sales are beating last year, too.
The trend is helping Gap shares move out of their two-year malaise:
The Future Is Bright
Today’s Gap isn’t the Gap I grew up with. Today, Old Navy drives the company.
The company expects to open 25 new stores this year (net of closures). Most of the new stores will be Old Navy and Athleta brands. The Gap and Banana Republic brands will suffer the brunt of the closings.
And that’s how it should be. Old Navy generated 6% more sales at its stores in 2017 versus the prior year.
In addition to spending on stores, some of the company’s $800 million in investments will go to its digital strategies. This makes sense in the world of Amazon ... and to improve the overall customer experience.
But make no mistake. Gap is a cash cow. In addition to its $1.8 billion of cash, analysts expect it to generate more than $800 million of free cash flow. That is cash flow from operations less the investments described above.
The company uses its cash to reward shareholders. It just increased its dividend by 5.4%. The stock yields 3% at this price.
And — wow — does Gap ever buy back shares! Since January 2004, it has bought back more than half of its shares. These buybacks have helped the company increase per-share sales each year except for one during that period. (And sales were effectively flat in fiscal year 2006.)
The Bottom Line
There's no doubt retailers are facing some headwinds from Amazon. But this weekend I confirmed people still find value in shopping like they used to.
That traffic makes management confident earnings will rise. I encourage you to consider Gap shares.
Good investing,
