Gap Inc Beats On Earnings Despite Currency Headwinds And Port Delays, But Issues Weak Guidance
Apparel major Gap Inc (NYSE:GPS) recently reported its Q4 fiscal 2014 earnings, which were marginally ahead of the consensus estimate. For the three months period ended January 31, the company reported net income of $319 million or 75 cents per share, a penny ahead of the market consensus. Its net income reflected a moderate year over year growth of 4%, driven by 3% growth in revenues (constant currency) and 10 basis points improvement in operating leverage, partially offset negative currency headwinds. On a reported basis, Gap Inc’s overall revenues for the fourth quarter increased just 2% to $16.44 billion, as dollar appreciated almost 13% last year. [1] [2]
The company’s underlying performance is clearer when we exclude the impact of currency fluctuations. For the fourth quarter of 2014, while the retailer’s earnings per share improved 10% year over year on a reported basis, it increased 20% on a constant currency basis. For the full year, these figures were at 5% and 10% respectively. Strengthening dollar has troubled a number of retailers who have their operations spread out globally and Gap Inc is the latest addition to this list.
Our price estimate for Gap Inc is at $50.51, implying a premium of over 25% to the market price. We are in the process of updating our model in light of the recent earnings release.
See our complete analysis for Gap Inc.
Disappointing Guidance For Fiscal 2015
While negative currency headwinds, underperformance of premium brands, intense competition from fast fashion retailers and West Coast ports delays subdued Gap Inc’s overall results, it was able to beat market estimates, due to which its share price ticked up a little in after hours trading. However, the company issued a disappointing guidance for fiscal 2015, citing strong dollar and West Coast port delays as the primary concerns.
Gap Inc said that it expects to earn $2.75-$2.80 per share in fiscal 2015, which reflects a year over year decline of -4% to -2%, and is notably below analysts’ consensus estimate of $3.01. The dollar is expected to rise 10% across currencies in 2015, which means that Gap Inc’s revenues coming from international markets, which represents almost 22% of its net revenues, will be impacted. Increasing incoming shipments and recently settled labor situation at West Coast ports have caused unwanted inventory delays for several retailers including Gap Inc, which has impacted their topline and bottomline growth. However, since an agreement between shippers and labor group has been reached and operations restored, West Coast problems should not trouble Gap Inc beyond a few quarters. Nevertheless, it seems enough to dent the company’s fiscal 2015 performance.
New Design Head For Gap
Gap Inc mentioned in its earnings call that the company has hired a new head of Design and Product Development for Gap, following its earlier announcement of eliminating the role of Creative Director. The company appears to be revamping the management structure of its Design department, in the wake of growing competition from fashion forward retailers. These include Zara and Forever 21, which have been nibbling Gap’s customer base for some time now. The retailer needed proactive steps to position itself in the league of fast-fashion retailers, who are doing very well in terms of attracting teenagers and young adults. Gap Inc recently appointed Wendy Goldman to lead Design and Product Development for the brand. Wendy had previously worked for 11 years with L Brands and eight years with Gap Inc, and we believe that she can leverage her expertise to gradually boost Gap’s product portfolio in terms of fashion.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap |More Trefis Research
Notes:- Gap Inc Reports Fourth Quarter and Fiscal 2014 Results, Gap Inc, Feb 26 2015 [↩]
- Gap expects dollar, port delays to hurt profits this year, Reuters, Feb 26 2015 [↩]