What’s On Tap For Gap Earnings Thursday

May 16th, 2012 by Trefis Team
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Specialty retailer Gap Inc. (NYSE:GPS) is scheduled to announce its Q1 fiscal 12 earnings on May 17th. [1] Since the company has already disclosed its Q1 sales along with its April sales, we believe its Q1 margins and international strategy will be prime focus areas on Thursday. Gap competes with other specialty retailers like Aeropostale (NYSE:ARO),  American Eagle (NYSE:AEO),  Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NASDAQ:URBN).

See our complete analysis for Gap

Margins in Focus

As Gap has already announced its Q1 sales along with its April sales, we expect the gross margins to be the focus of the earnings. Gap earlier reported solid Q1 sales results, with a 4% increase in comparable sales and a 6% increase in net sales. We believe the Q1 sales results were quite impressive on q-o-q basis, and reflect a slow but steady turnaround for the San Francisco-based teen apparel retailer. (See: Gap Stumbles In April But Q1 Performance Is Solid Overall)

We expect Gap to see an improvement in margins, particularly on a quarterly basis. Firstly, the company should start realizing the benefits from declining cotton prices. Cotton prices recently slumped to a 21-month low, mainly due to an increase in supply and a decline in Asia’s industrial output. [2]

Secondly, the gradually improving U.S. macro-economic conditions have also resulted in a decline in promotional scales of the U.S. teen apparel market. A lesser promotional scale in the Spring season should result in higher full-priced merchandise sales for Gap, which should lead to improved average unit retail (AUR) price and better margins.

Gap’s international strategy

This is another key area to watch for on Thursday. We will closely watch for any updates on Gap’s international strategy, as this will help clear why despite projecting its international business as an alternative to fickle domestic sales, the company is consistently comping negatively in this channel. Gap’s international comparable stores sales for the Q1 were negative 4% compared to negative 6% last year.

We have a Trefis price estimate of $29.89 for Gap’s stock, a premium of around 7% to the current market price. 

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Notes:
  1. Gap to announce Q1 earnings on May 17th, Source: Gap’s IR [↩]
  2. Cotton prices at 21-month low, Source: Bloomberg [↩]