Gap Inc Earnings: Premium Brands Revival Efforts Not Enough To Energize 2015 Outlook
Gap Inc (NYSE:GPS) recently reported its Q1 fiscal 2015 earnings with its net sales falling behind the consensus estimates and earnings per share coming inline. The company’s net sales fell 3% to $3.66 billion, while analysts polled by Thomson Reuters were expecting the figure to be around $3.75 billion. Earnings per share settled inline with the consensus estimates at $0.56, falling 3% from the year ago period. Gross margins shrunk 100 basis points year over year to 37.8% weighed down by promotional discounts and currency headwinds. Operating income declined to $386 million from $443 million in the same quarter last year. [1]
Gap Inc’s disappointing growth is mainly attributable to its struggling premium brands and negative impact of exchange rates. Gap and Banana Republic reported comparable sales decline of 10% and 8%, respectively, partially offset by 3% growth at Old Navy. Strengthening dollar had a negative impact of almost $90 million on net revenues. The retailer even said that the residual effect of West Coast port delays also had a negative impact on the company’s topline growth. [2]
Looking ahead at the remainder of the year, Gap Inc reiterated its EPS guidance of $2.75-$2.80, indicating that Q1 results were mostly inline with its expectations. As far as the near term performance is concerned, currency headwinds will continue to trouble Gap Inc, as a significant portion of its revenues come from outside the U.S. A near-term turnaround for Gap and Banana Republic is unlikely though they have shown some positive results, mainly in men’s business and new collection. However, the retailer is confident that Old Navy will sustain its growth momentum throughout the year.
Our price estimate for Gap Inc is at $52, implying a premium of about 35% to the market price. However, we are in the process of updating our model in light of the recent earnings release.
See our complete analysis for Gap Inc.
Negative Currency Headwinds Throughout The Year
Dollar has appreciated significantly against other currencies over the last one year and it is likely sustain this momentum this year as well. Exchange rate analysts at BMO Capital believe that dollar can appreciate 5%-15% against other currencies in 2015. [3] While this signals the reclaimed strength in the U.S. economy, it is weighing heavily on companies that have a sizable portion of their business spread abroad. Gap Inc earns close to 22% of its revenues from international markets and despite steady growth in constant currency, it has actually regressed in terms of reported revenues lately. This may well continue in the coming three-four quarters.
Gap’s Women’s Business Gets Extra Attention
Gap Inc’s premium brands have not done well over the past six seven quarters mainly due to the weakness in their women’s business, which the company has been unable to rectify. It however assured investors in the Q1 earnings call that Gap’s shortcomings have been diagnosed effectively and the design and merchandising team is proactively working to address the issue. The retailer said that at the base of Gap’s problems were several merchandise lines that were off-brand and off-trend, which drove customers away. With the arrival Wendy Goldman, Gap Inc believes that these problems will be resolved quickly, and the brand’s women’s business will soon be back on track. Gap’s kids, baby and men’s business is already performing well and women’s revival will do wonders for its growth. We believe Gap must take a few notes from Old Navy’s book to formulate some relevant merchandising and marketing strategies. [1]
New Designers Is The Way For Banana Republic
Banana Republic isn’t weak across the board anymore. Though its overall growth was disappointing, Marissa’s first collection launched towards the end of the quarter performed very well. The collection was relevant to the brand image and it somewhat allowed Banana Republic to re-invent its brand credibility. Even though there were bits and pieces in this collection, where the company could have done better, overall customer response has laid out a path for the brand. Banana Republic needs to bring new designers on-board who can understand its target market and customer preferences very well, and come up with fashion and price relevant products. [1]
Gap Inc is making several efforts bring to its iconic brand and luxury segment back on track, but it will be a while before these efforts transition into notable improvement in performance. Until that happens, the company may continue to report lackluster results, given that Old Navy alone won’t be able to drive its growth, thanks to currency headwinds.
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Notes:- Gap Inc Q1 Fiscal 2015 earnings transcript, May 21 2015 [↩] [↩] [↩]
- Gap Inc Reports First Quarter Results, Gap Inc, May 21 2015 [↩]
- Dollar Forecast to Rise 15 Pct in 2015 Say BMO Capital, PoundSterling Live, Jan 22 2015 [↩]