Gap Earnings Preview: What We’re Watching Thursday

November 16th, 2011 by Trefis Team
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Gap Inc. (NYSE:GPS) is set to report its third quarter earnings of fiscal 2012 on Thursday in what will be closely watched following Abercrombie’s earnings announcement that led its stock to slump 15% Wednesday morning. Here we highlight a few key trends to watch for in the upcoming earnings release. Gap Inc. is a leading global specialty retailer offering clothing, accessories, and personal care products and competes with the likes of Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO).

We currently have a $26.76 Trefis price estimate for Gap, about 30% above the current market price.

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See our full analysis on Gap Inc.

Net Revenue for the Quarter Declines, However Gross Margin Should Trend Higher Sequentially

Q3 has been disappointing for Gap on the revenue side as the company registered a decline in sales for August and October, whereas the September sales remained flat compared to that of last year. [1] [2] [3] While the decline in August was because of a weak back-to-school season, September and October were slow due to macro-economic weakness. On a positive note though, October reflected a slight improvement in domestic comp sales compared to previous two months.

On the margins front we expect Gap to improve its margins compared to that of Q2. Solid growth in online sales and a decline in cotton prices will help the company to ameliorate its margins for this quarter. However, we expect the margins to be less compared to that of Q3 last year, as the apparel market is still very much promotional in nature.

International Growth looks Good in Q3 but Negative International Comps Still Worrisome

Q3 also marked the emphasis Gap has been giving on international growth. The company strengthened its operations in China with new store in mainland China and Hong Kong. Gap also expanded its business in Russia with its first Banana Republic store in the country. Simultaneously Gap also entered new markets such as Chile, Vietnam and Guam.

Though the international growth has certainly been credible, it is the sequentially declining international comp sales which is the major source of concern. While much was anticipated from the annual investor meeting, the company failed to provide any update on why the international comp sales are falling despite Gap projecting international growth as a substitute to its ailing domestic business and how the company is preparing to deal with Chinese economic slowdown. We will be keenly following the Q3 earnings for updates on above two concerns.

See our article: Gap Strategy Update Disappoints, Fails to Explain International Slump

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Gap reports August sales, Source: Gap IR [↩]
  2. Gap reports September sales, Source: Gap IR [↩]
  3. Gap reports October sales, Source: Gap IR [↩]