Higher Consumer Spending To Benefit Gap Inc. In The First Quarter

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Gap Inc. (NYSE:GPS) is slated to report its first quarter earnings on May 24, wherein a 5% growth in revenues and a 28% improvement in earnings is expected. Old Navy is again set to drive the revenue growth for the company, helped by an improvement in consumer spending. Gap’s other brands should also benefit from this trend. In the preceding quarter (Q4 2017), its namesake brand and Banana Republic moved away from the negative territory, with the former noting flat sales, while the latter posted 1% comps growth. Gap has made a considerable effort to increase the speed to market of its merchandise and improve its e-commerce capabilities in order to drive traffic, which should help it deliver an improvement in results. The earnings growth is expected as a result of the reduction in the corporate tax rate. Gap is aiming for its comparable sales to be flat to up slightly in FY 2018, and EPS to fall in a range of $2.55 to $2.70.

We have a $34 price estimate for Gap Inc., which is higher than the current market price. The charts have been made using our new, interactive platform. You can modify the different driver assumptions by clicking here for our interactive dashboard to gauge their impact on the revenues, earnings, and price estimate for Gap Inc.

Factors That May Impact The Quarter Performance

1. Latest Thomson Reuters Same Store Sales (SSS) Index: Analysts polled by Thomson Reuters are increasingly bullish on consumer spending in the wake of strong holiday sales, which they feel has continued into the first quarter. The Thomson Reuters Same Store Sales Index has shown a stronger comparable sales growth in Q1 2018 versus Q1 2017. Besides improving consumer confidence, retailers can also be expected to benefit from easier comparisons, given a weak first quarter last year.

2. Higher Retail Sales: According to the U.S. Census Bureau, retail sales were up 4.7% in April. Categories with strong growth included clothing/clothing accessories, which rose 4.1% as compared to the previous year, a factor that should bode well for apparel retailers. Macy’s, which posted its first quarter results recently, reported strong consumer spending as a factor that resulted in the company raising its full year earnings guidance. This should put the confidence back into the retail industry.

3. Increasing Old Navy Store Count: The segment surpassed $7.2 billion in sales in FY 2017, contributing to nearly half of the company’s total sales, and was reported to be “the fastest-growing major apparel brand in the U.S.”  The fact that the brand’s merchandise tends to be skewed towards the affordable segment has worked in its favor. Seeing its impressive performance, Gap has accelerated Old Navy store openings, with over 30 opened in FY 2017. The company feels the brand remains under-penetrated when compared with its peers, and hence, plans to double the store openings in the current financial year, which should help to increase the revenues.

4. Popularity Of Athleta: According to the NPD group, the activewear industry is the “primary driver of growth opportunity” for the apparel industry. Sales in this category increased 2%, valuing the market at roughly $48 billion in 2017. Hence, it is no surprise that Gap’s Athleta brand has been performing well, in fact, at a much faster rate than that of the industry. The brand moved from mid-teens sales growth in the first half of the year to mid-20s in the back half. The active-business of Gap and Old Navy brands also delivered high single-digit growth in 2017. We expect continued strong growth of this brand in FY 2018. In line with its growth strategy detailed during FY 2017, the company expects store openings to be focused on Athleta and Old Navy, with closures weighted toward Gap and Banana Republic.

5. Improvement In Online Business – The online and mobile business is the place to be these days, and Gap has ensured its presence is felt in the space. The company has one platform for all of its brands, ensuring customers can purchase items for any of them in one place. This has also ensured its new brands get the recognition that would not have been possible if they had had a separate web presence. An upshot of this is that the company was able to deliver 30% growth from its online channel in the fourth quarter of FY 2017, and was able to beat its own target of reaching $3 billion in online revenues last year by over $100 million. The company has also focused its investment into the native mobile apps and on improving site speed. These factors should ensure the growth of this segment in the future.

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