Gap Inc.’s Stock Rises Despite A Fall In October Sales

November 15th, 2016 by Trefis Team
-3.20%
Downside
21.88
Market
21.18
Trefis
GPS: Gap logo
GPS
Gap

Investors seem to think that a small sales drop is better than a big one. Apparently this is the reason behind a rally in Gap Inc‘s (NYSE:GPS) share price since the time the company reported its October sales and its earnings guidance for the third quarter. The company reported a 1% drop in same-store sales for October, citing a negative impact of three percentage points from the August fire in one of its distribution centers. What is encouraging for the investors is that the fall in comps is primarily caused by the fire, and if that event had not occurred, the company would have reported a positive 2% growth in same-store sales. The third quarter sales fell slightly to $3.8 billion from $3.86 billion in the  previous year. The company also issued an EPS guidance of $0.59-$0.60, compared with analyst estimates of $0.53.

Gap Stock Price

See our complete analysis for Gap Inc.

There are signs the company may finally be on the road to recovery, with promising results posted in the month. It is also the second month in a row when the company has reported encouraging results. In September, Gap had stated its comparable sales fell 3%; however, if the negative impact of the fire, which occurred in a building on its Fishkill, New York distribution center campus, is excluded, it would have resulted in a flat performance. Old Navy has continued with its streak of positive comps, with 3% reported in October. Once this figure is adjusted for the fire impact, it would translate to a 4% growth in same-store sales.

Gap Comps Table

Even Banana Republic improved on its performance, with -4% comps reported, a flat performance if the fire impact is excluded. The brand is banking on its collection co-signed by fashion personality Olivia Palermo, their newly hired global style ambassador, to help pull itself out of the rut. The collection, which debuted at the New York Fashion Week went on sale online alongside the presentation, in continuation of their see-now-buy-now strategy. Like other mall-based retailers, the company is being hurt by the declining foot traffic, and a shift in consumer spending towards travel and experiences, rather than on clothing. The retailer’s strategy of never-ending discounts has also trained customers to avoid buying at full price. In its earnings call in May, Peck acknowledged the damage done to the Banana Republic brand by its excess promotions. The company has now tightened its promotions, and instead of discounts, the brand is offering its limited-edition collection with Palermo in order to attract more customers.

BR & Gap Comps Chart

Another positive to come out of the monthly sales report was regarding the merchandise margins. According to the company, the metric actualized higher than previously expected, which “more than offset the estimated earnings impact from the lost sales and increased logistics costs during the month” that resulted from the Fishkill distribution center fire.

Have more questions about Gap Inc? See the links below:

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Gap Inc.
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