Gap Inc. (GPS) is a premier international specialty retailer offering a diverse range of clothing, accessories and personal care products for  men, women, children and babies. Its flagship brands include Gap, Banana  Republic, Old Navy, Piperlime and Athleta. Approximately three-fourths of Gap’s revenue is generated from its operations in the U.S.

With a market cap of over $15 billion, The Gap is the industry leader by a stretch in the highly fragmented specialty retail sector. The Gap’s globally recognized brands complement one another, enabling it to leverage its position in the sector.

The Gap has a strong balance sheet with cash and cash equivalents of $2.1 billion at quarter end and no outstanding debt. Furthermore, the company  has $439 million available under its $500 million revolving credit facility.

Management has taken stringent cost-control measures and prudent inventory management policies to reduce the operating expenses and increase cash flow. We view this as a positive step in the current credit-constrained market, where adequate cash resources are vital for sustenance.

The Gap has established quite a track record of conservative capital management and cash returns to shareholders in the form of a steady dividend and share repurchases.

The Gap realigns its inventory according to sales trends and continually invests in the store fleet in a manner that augments the return on capital invested.

The company has improved its business model by realigning its inventory to sales trends. Further, it has a strong balance sheet with adequate liquidity, no outstanding debt and a steady dividend policy.

We, therefore, upgrade the stock from Neutral to Outperform as we anticipate it to perform well above the market.

Zacks Investment Research
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