Gap's International Outlook Signals Possible Long Play

By Andrew Keene  FEB 28, 2013 1:07 PM

The retailer successfully expanded into the Chinese market, and will now focus on the Brazilian market.

 


The Gap, Inc. (NYSE:GPS) opened its first store in China in 2010. Then the company opened a total of 25 stores in China in 2012 and six so far in 2013. Gap hopes to repeat this success story in the southern hemisphere and has set its sights on Brazil, a key market since shoppers are seeing more disposable income than ever before. Studies show that Brazilians' disposable income has tripled over the past five years.

The company opened its first store in Brazil in 2011. This move followed five years of market research, which included offering apparel in duty free airport shops to test the waters. Stefan Laban, Gap's managing director of strategic alliances, stated, "We don't come to Brazil to open three stores; it's going to be many more than that," suggesting that the company is targeting a growth rate similarly ambitious to what it experienced in the Chinese market. 

In 2012, Gap's international business accounted for $2.1 billion of revenue, compared with $12.4 billion of revenue in North America.
Movement on Earnings:

11/16/12   $33.26   $33.59  $+0.33 (1.0%)
08/17/12   $34.34   $35.99  $+1.65 (4.8%)
05/18/12   $26.31   $25.71  $-0.60 (-2.3%)
02/24/12   $23.52   $22.57  $-0.95 (-4.0%)
11/18/11   $19.25   $18.76  $-0.49 (-2.5%)
08/19/11   $15.52   $15.69  $+0.17 (1.1%)
05/20/11   $23.29   $19.22  $-4.07 (-17.5%)
02/25/11   $22.49   $22.75  $+0.26 (1.2%)
Historical Earnings Move: Mean 4.3%, Median 2.4%

Near-Term Straddle Indication:

Term  Strike        NBBO             Size      %Spot(Mid)
03/01  $32.5   $1.60 - $1.73    91 x 111     5.1%
03/01  $33      $1.63 - $1.73    47 x 99       5.1%

My Trade: Selling the GPS March 32.5-31.5 put spread for $.40
Risk: $60 per 1 lot
Reward: $40 per 1 lot
Breakeven: $32.10

The 50-DMA and 200-DMA are $32. I like this trade because I make money if the stock is flat, or if it goes higher.
No positions in stocks mentioned.