US retail – Gap closes

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Who were the coolest dudes at the mall this summer? Surprisingly, one of them was Gap, a company that was hugely popular in the 1990s but lost its lustre in the new millennium. Its saving grace was that even if Gap’s fashion sense was off, its management never lost its skill in controlling costs. Retailers must ultimately make stuff people want to buy, however, and it looks as though Gap may have started to get its fashion mojo back.

The company beat expectations for net income and sales in the second quarter. And its same-store sales rose 4 per cent in the period. That follows a similar increase the previous quarter, the first quarterly increases since 2010.

Gap shares appear to be regaining popularity with investors too. Since the start of August, the stock has risen more than 20 per cent, hitting a ratio of about 17 times earnings estimates for this fiscal year. That is in line with the multiple at Limited Brands, which owns Victoria’s Secret and has delivered quarterly same-store sales growth of between 7 and 9 per cent during the past year.

The question for shareholders is whether Gap’s stores will stay in style this autumn. And whether Gap may finally be getting its fashion right just in time for a renewed slowdown in the US economy. A look at 10 retailers that reported earnings in the past few weeks shows that quarterly same-store sales remain generally positive. The discounters TJX Companies and Ross Stores were particularly strong with quarterly increases of 7 per cent. Most companies, including Gap, have raised earnings guidance for the year.

But at eight of the chains same-store sales growth slowed from the first to the second quarter. That raises the idea that an economic slowdown in the US may already be leading to tighter purse strings among consumers. Now that would be a drag throughout the mall.

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