What To Expect From Gap Inc.’s Year End Results?

by Trefis Team
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Gap Inc. (NYSE:GPS) is slated to release its fourth quarter and financial year ended January 2017 earnings on February 23, 2017. The last quarterly earnings posted by the company came in line with consensus estimates.

Gap Pre-Eanings Q4 2016- 1

Gap reported its January sales on February 6, wherein it noted a rise in net sales of 2% to $828 million, compared with net sales of $813 million for the corresponding period last year. For the fourth quarter of FY 2016 (ended January 2017), the company’s net sales increased 1% to $4.43 billion, as against $4.39 billion in the same quarter in the prior financial year. Amid a challenging retail environment, the growth in the net sales and comparable sales bodes well for the company. This also prompted the Gap to raise its earnings guidance for the year, to be in the range of $1.68 to $1.69 per share. On an adjusted basis, it would imply a range of $2.01 to $2.02 per share, excluding one time costs and benefits, higher than its previous guidance of $1.87-$1.92.

See our complete analysis for Gap Inc.

Banana Republic Performance Continues To Be Weak

While the performance at Gap and Old Navy improved on a monthly and a quarterly basis, the performance at Banana Republic was again lackluster. At Gap Global, the comps increased by 3% in January, compared to a 6% drop recorded in January of last year. Similarly, comps at Old Navy rose 2%, following a 6% dip noted in the year-ago period. However, Banana Republic continues to flounder, with the brand recording a 4% decline in comps, although it is narrower than the 17% fall seen in January 2016.

Gap Pre-Eanings Q4 2016- 2

Banana Republic can be identified as the weak link for the company, as the company has seen an extended downward spiral in sales. Lackluster product assortment is pushing customers away from the brand, and the consumers are unwilling to pay the premium prices it once commanded. Despite a number of steps being undertaken to improve the performance, Banana Republic has not shown any signs of a turnaround. During the month of December, which is key in the important holiday quarter, the brand again stumbled, following a positive showing in November. The comparable sales declined 7% as compared to the same period last year, when the comps declined by 9%. This may be a reason for Gap’s announcement on January 25 of the departure of Andi Owen, global brand president of Banana Republic, who will be leaving the company in late February.

BR Comps- Q4 2016

Better Showing Tied To Lower Taxes?

Backed by solid sales results, the company issued a raised guidance for the fourth quarter and financial year 2016. The adjusted earnings per share range of $0.50 to $0.51 for the fourth quarter easily beat analysts estimates of $0.45. Furthermore, the range for the full year of $2.01 to $2.02 also came in higher than expectations of earnings per share of $1.96. The net sales of $4.43 billion also beat consensus expectations of $4.4 billion.

However, while these results may seem encouraging, the improved performance could be a result of a lower tax rate, and not a consequence of much fundamental improvement, as noted by Mizhuo Securities. As January signifies the end of the holiday period, which is littered with clearance sales, it may not be symptomatic of any future potential. The Old Navy brand actually saw sequential comps deceleration, as evidenced by the brand’s comps in December of 7%.

Gap Inc. is facing much of the same problems plaguing the retail industry, the primary one being reduced traffic. While consumers are still willing to spend their money, there has been a fundamental shift in what they are choosing to buy. Shoppers are increasingly moving away from spending on apparel towards more spending on experiences, such as vacations, eating out, or a concert. This is reflected in the reduced traffic to malls and stores. The company is also facing increased pressure from fast-fashion retailers, such as Zara and H&M. These brands are able to move styles from the runway to the stores within weeks, constantly evolving their assortment and keeping their products fresh. Historically, retailers placed their bets on fashion a year in advance, and since they marked their products higher, there was room for markdowns. However, now companies have realized that by cutting the time down to three to six months, they don’t need to price the items higher. As under the previous CEO Glenn Murphy, CEO Peck is also looking to speed up and improve  the supply chain, and claims significant progress has been made to accomplish this. Gap has been building its responsive supply chain capabilities, in order to buy on a more continuous basis. This will help to deliver “newness” constantly into the stores. However, given the top line challenges, 2017 may prove to be another tough year for Gap.

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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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