The Zacks Analyst Blog Highlights: Gap, American Eagle Outfitters, The TJX Companies, Zimmer Holdings and Stryker

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Nov 21, 2011, 09:30 ET

CHICAGO, Nov. 21, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Gap Inc. (NYSE: GPS), American Eagle Outfitters Inc. (NYSE: AEO), The TJX Companies Inc. (NYSE: TJX), Zimmer Holdings (NYSE: ZMH) and Stryker Corporation (NYSE: SYK).

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Here are highlights from Friday's Analyst Blog:

Negative Comps Hit Gap's Profits

Battered by negative comparable store sales growth, increased input costs and deep discounting, Gap Inc.'s (NYSE: GPS) third-quarter 2011 earnings of 38 cents per share declined 20.8% from the prior-period earnings of 48 cents per share. However, quarterly earnings managed to beat the Zacks Consensus Estimate by a penny. The impacts of negative forces on earnings per share were partially offset by the company's massive share repurchases.

Quarter in Detail

During the quarter, net sales edged down 1.9% to $3,585.0 million from $3,654.0 million in the year-ago quarter. Total revenue marginally missed the Zacks Consensus Estimate of $3,586.0 million.

Same-store sales slipped 5.0% for the quarter versus an increase of 1.0% in the prior-year quarter primarily due to negative double-digit comparable sales growth in the company's women's business. Gap reported a decline in same-store sales across all brands. Same-store sales of Gap North America, Banana Republic North America, Old Navy North America and International brands declined 6.0%, 1.0%, 4.0% and 10.0%, respectively.

Quarterly gross profit fell 12.7% year over year to $1,314.0 million, and gross margin contracted 450 basis points (bps) to 36.7%. Operating expenses, as a percentage of sales, leveraged 40 bps from the prior-year quarter to 27.0%. Gap's operating income plunged 31.3% year over year to $346.0 million, while operating margin shriveled 410 bps to 9.7%.

Balance Sheet and Dividend

At the end of third quarter, the company has cash and cash equivalents of $1,392.0 million compared with $1,403.0 million in the year-ago period and free cash flow of $222.0 million.

In third-quarter 2011, the company deployed $645.0 million of cash toward share buybacks and $55.0 million toward dividends. Gap's board of directors has authorized a new $500.0 million share repurchase program. During the quarter, Gap paid a quarterly dividend of 11.25 cents per share to its shareholders, up 13.0% from the prior-year period.

In the reported quarter, the company repurchased about 107 million shares for $2.0 billion.

Year-to-date, the company has made a capital expenditure of $416.0 million and expects to expend $575.0 million in Capex for fiscal 2011.

Store Count

During the reported quarter, Gap opened 41 company-operated stores and shuttered 29 locations, bringing the total company-operated store counts to 3,065. Moreover, in the third quarter, the company has opened 18 stores in franchise business while closed 2 stores bringing the total franchise store counts to 211.

In an effort to improve customer experience and enhance productivity per square footage, the company intends to strategically close and consolidate square footage at Gap and Old Navy brands. Gap wants to strategically reduce its Gap North America store counts to 950 by the end of fiscal 2013 including 700 specialty stores and approximately 250 outlets.

Contrary to this, the company is planning aggressively to expand its international and franchise business. The company intends to triple the Gap store count in China from 15 to approximately 45 during the next 12 month period. Moreover, the company is anticipating opening a total of 60 franchise stores by the end of fiscal 2011, of which it has already opened 33.

Guidance

The company has maintained its fiscal 2011 earnings guidance in the range of $1.40 to $1.50 per share. The current Zacks Consensus Estimate stood at $1.50 per share which at the higher end of guidance range.

Based in San Francisco, California, Gap 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.

In a drive to boost international operations, Gap consolidated its foreign business under one division from London. Lackluster sales in North America compelled the company to explore business in other shores. In order to counter the domestic market saturation, Gap is aiming to generate 30% of total sales from its overseas operations and online business by 2013.

To achieve this end, Gap has opened its stores in China, Italy and Australia and has launched e-commerce business in more than 90 markets, which are expected to bolster its top and bottom line performance, moving forward.

Above all, Gap operates in a highly fragmented market and competes with national and local department stores and discount stores, such as American Eagle Outfitters Inc. (NYSE: AEO) and The TJX Companies Inc. (NYSE: TJX), which offer products at fire sale prices. To retain the existing market share, the company may have to slash sales prices, which could affect margins.

Gap's shares maintain a Zacks #2 Rank, which translates into a short-term Buy rating. Our long-term recommendation on the stock remains Neutral.

Zimmer Acquires ExtraOrtho

Zimmer Holdings (NYSE: ZMH), a global orthopedic and surgical products company, has acquired Memphis-based medical device company ExtraOrtho. ExtraOrtho with its external fixation line, XtraFix External Fixation System, is expected to broaden Zimmer's existing portfolio of trauma-care solutions and also bolster the company's position in the external fixation market, which is estimated to be $820 million. However, financial terms of the deal have not been disclosed.

On the heels of a series of newly launched technologies, Zimmer has emerged as one of the fastest growing companies in the $5.5 billion global trauma market. During the third quarter of 2011, Zimmer recorded double-digit sales growth in its trauma business across all geographies, particularly in Europe, Middle East and Africa, where the growth rate was 21.4% (at CER).

Over the past few quarters, the company has been witnessing expansion in the NCB Periprosthetic Plating system, which primarily addresses complex femoral fractures that can occur around the knee or a hip implant. Furthermore, the Natural Nail product family, particularly the Cephalomedullary Nail, continues to be the growth driver for this segment.

The company has embarked on its growth trajectory with new product launches, implementation of new technologies and expansion into the emerging markets. Additionally, we believe the company's strong cash generation, with $553 million in cash and cash equivalents and debt as a percentage of total capital at 21.6% in the last reported quarter, facilitates meaningful investment and acquisitions.

However, Zimmer continues to witness challenges in the form of pricing pressure and lower procedure volumes resulting from economic uncertainty. Moreover, the company faces tough competition from players such as Stryker Corporation (NYSE: SYK), among others.

We have a Neutral recommendation on Zimmer, in line with its peers. All the stocks mentioned above retain short-term Zacks #3 Ranks (Hold).

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