GPS: 3 TURNAROUND Retail Stocks with Significant Potential Upside

With the positive developments on the vaccine front, the start of a global economic recovery is hoped for soon Moreover, a bipartisan group of lawmakers have delivered a $908 billion coronavirus relief plan proposal. If passed, the relief plan together with vaccine distribution should provide a boost to the retail space as the economic recovery drives higher consumer spending.

As consumers have become comfortable with online shopping, established brands that focus on strengthening their online platforms and direct-to-consumer services are expected to thrive in the long run.

Investors’ renewed confidence in the retail space is evident from the SPDR S&P Retail ETF’s (XRT) 37.4% gain over the past 6 months. While some retail companies failed to stay afloat amid the pandemic, Gap, Inc. (GPS), Ralph Lauren Corporation (RL), and Natuzzi, S.p.A. (NTZ) performed relatively well . In fact, these three companies delivered strong results in their last quarterly earnings reports. With the holiday season providing some support, we think these retail stocks are expected to bounce back in a big way.

Gap, Inc. (GPS)

Based in San Francisco, California, GAP is the largest specialty apparel company in the United States. Operating worldwide, the company’s products are available to customers online through company-owned websites and using third parties that provide logistics and fulfillment services. GPS offers its products under the brands — Old Navy, Gap, Banana Republic, Athleta, Intermix, Janie and Jack, and Hill City brands.

For the third quarter ended October 2020, GPS’ net sales increased 22% sequentially to $4 billion. driven by a 61% year-over-year increase in online sales. For the Athleta brand, comparable net sales increased 37% year-over-year–the highest yearly growth the brand’s history. The company recovered in the third quarter, reporting positive net income and EPS compared to negative values in the second quarter. Reported net income and EPS were $95 million and $0.25, respectively, for the third quarter.

Analysts expect GPS’ revenue to increase 46.1% for the quarter ending April 2021, and 13.5% in 2022. The company’s EPS is expected to increase 93.6% for the quarter ending April 2021, 160.6% in 2022, and at a rate of 2.3% per annum in the next five years. In the past 6 months, the stock rallied 57.4% to close yesterday’s trading session at $21.49.

GPS announced in November that Sandra Stangl will join the company as the new President and CEO of the Banana Republic brand. The company unveiled its Power Plan 2023 strategy, a couple of months ago. Also, earlier this year, Kanye West partnered with GPS bringing his YEEZY brand into the company. The YEEZY Gap line is expected to appear in Gap stores in 2021.

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Ralph Lauren Corporation (RL)

RL, based in New York, is a global leader in the designing, marketing, and distribution of premium lifestyle products. The Company operates through three segments — Wholesale, Retail and Licensing. The company’s brand names include Ralph Lauren Collection, Polo Ralph Lauren, Double RL, Polo Ralph Lauren Children, Chaps, and Club Monaco, mong others.

Even though deeply affected by the pandemic, the company has and reported promising results for the quarter ended September 2020. Net revenues increased 144.8% sequentially to $1.2 billion. RL continued to fast-track its company-wide digital transformation. In the North America segment, digital commerce increased 10% year-over-year, while in Asia that segment increased 32% year-over-year. Gross profit increased 129.3% sequentially to $799.4 million. EPS of $1.44 surpassed the consensus estimate by 60%.

Analysts expect RL’s revenue to increase 3.1% for the quarter ending March 2021 and 25.4% in 2022. The company’s EPS is expected to increase 138.2% for the quarter ending March 2021, 319% in 2022, and at a rate of 1.3% per annum in the next five years. The stock has gained 29.4% in the past 3 months and gained 59.3% since hitting its 52-week low of $59.82.

Embracing the new digital world, the company has launched several digital stores. Moreover, RL is launching a partnership with Snap Inc. (SNAP) that will enable users to scan the company’s Polo Pony logo from a variety of sources to unlock a series of augmented reality experiences. Last month, the company was named the official outfitter of the Australian Open tennis tournament.

RL’s POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with a “B” for Trade Grade and Industry Rank. Among the 65 stocks in the Fashion & Luxury industry, it is ranked #21.

Natuzzi, S.p.A. (NTZ)

Italy’s largest furniture house, NTZ was founded in 1959 by Pasquale Natuzzi who is the current CEO of the company. It designs, manufactures, and markets leather and fabric upholstered furniture through its own and franchised stores worldwide. The company operates through two segments — Natuzzi brand and Softaly/Private label.

For the third quarter ended September 2020, the company gradually started its recovery towards normal operations. Revenue increased 37% sequentially. Branded business revenue increased 4% year-over-year driven by a 26.3% year-over-year increase in the EMEAI region. Gross profit increased 70.2% sequentially.

Earlier this year, NTZ launched a new mono brand store in Bratislava, Slovakia. The new showroom offers a wide selection of products displayed across 22 room sets. In July, the company renewed its accounts-receivables securitization facility with an affiliate of Intesa Sanpaolo S.p.A. for an additional 5-year period. The stock has gained 602.9% so far this year to close yesterday’s trading session at $11.95.

It is no surprise that NTZ is rated “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, and Peer Grade and a “B” for Industry Rank. In the 69 -stock Home Improvement & Goods industry, it is ranked #42.

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GPS shares were trading at $21.73 per share on Wednesday afternoon, up $0.24 (+1.12%). Year-to-date, GPS has gained 24.56%, versus a 16.02% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...