The Gap Is Accelerating Store Closures; Here's Why Some See That As A Positive

Gap Inc (NYSE: GPS) reported Thursday its third quarter results, which consisted of a top and bottom-line beat, an upward revision to its full year EPS guidance and an update on store closures.

The Analyst

Deutsche Bank's Paul Trussell maintains a Hold rating on Gap's stock with a price target raised from $26 to $27.

The Thesis

The retailer delivered another "solid" earnings report, driven by a better than expected comparable store sales gain and gross product margin gains, Trussell said in a note. All three of the company's core brands showed an improvement from the prior quarter and beat industry traffic trends. The Athletica brand also showed signs of continued momentum, which helped boost the company's "other" segment sales growth to 16.2 percent year-over-year versus 15.5 percent in the second quarter. In addition, overall AUR (average unit revenue) rose for the fourth consecutive quarter.

The company updated investors on its store closure plans at Gap and Banana Republic and will now do so at an accelerated pace, the analyst said. This is a positive as it demonstrates management's commitment to improving overall productivity by reducing its exposure to "traffic challenges" even though the GAp's traffic exceeded the industry average in the quarter.

However, the company will face difficult comp and margin compares next year, which implies for the time being it's too early to become constructive on the stock, the analyst said.

Price Action

Shares of Gap gained more than 8 percent to $29.78 Friday morning.

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