Wednesday, December 27, 2006

Calls of Note Part 3

- Piper Jaffray is cautious on Gap (NYSE:GPS) saying holiday sales appear weak at core Gap brand; traffic may not be only culprit: Core Gap stores have experienced flat or negative traffic trends in each of the last 25 months, owing to inconsistent merchandise and promotional patterns and deteriorating brand equity with the traditional casual wear customer

The firm has noted accelerated promotional activity relative to the prior year with markdowns being taken on a weekly basis and the company introducing its 50% storewide banner one week earlier than last year. Additionally, the company's Project Red, premium priced assortment, is being aggressively discounted in order to clear goods. Piper is trimming their FQ4 sales and EPS estimates.

On a positive note, they think Banana Republic remains the star performer in the GPS trio and a 40% off event week 4 (week prior to holiday) was well received by customers. Inventory of key items, especially sweaters, wool bottoms, and outerwear appeared well managed into the final holiday weekend.

Shares are fairly valued for fundamentals; upward moves in shares are based on speculation: At 16x FY08E EPS of $1.25, they believe the risk-reward profile of GPS shares is fairly balanced. Maintains $19 tgt. Maintains MP.

Notablecalls: Not the type of call you want to put out a short line on. Not actionable but good to know category. I'd rather wait for GPS to stumble and then pick up some stock for the inevitable bounce.

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