Disappointing Guidance Results In Stock Price Fall For Gap

by Trefis Team
Gap Inc.
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After a flurry of retail cheer, the momentum expected by Gap Inc. (NYSE:GPS) has proved to be a bit of a downer. The company anticipates comparable sales for fiscal year 2018 to be flat to up slightly. While the company beat expectations on revenue, it missed by 4 cents on earnings per share. Although the company delivered its sixth consecutive quarter of positive comparable sales growth, its revenue growth was pressured as a result of the unseasonably cold weather conditions. Consequently, the ability of the company to reach the high end of its full-year guidance, of EPS to be in the range of $2.55 to $2.70, has now become even more challenging. On the other hand, with the onset of Spring, the company remains upbeat regarding its second quarter performance.

We have a $34 price estimate for Gap Inc., which is slightly 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 Future Performance

1. Continued Strength of Old Navy: The brand was able to deliver comps growth of 3%, against a tough comparison of 8% last year. Growth was seen in all categories at Old Navy, with Denim having the biggest quarter comp in the brand’s history. 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, and 9 in Q1 2018. The company feels the brand remains under-penetrated when compared with its peers, and hence, plans to double the store openings as compared to FY 2017, which should help to increase the revenues.

2. 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 had another strong quarter with double-digit growth, and we expect the momentum to continue through 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 the Banana Republic.

3. Margin Pressure at the Gap Brand: The operating model improvement process at the company’s namesake brand has been fraught with inventory problems. As a result, the company was saddled with excess inventory coming into the first quarter, which consequently impacted the company’s sales from this brand as well as its ability to optimize its margins, since it forced the brand to be more promotional. The overall gross margins of the company fell 20 basis points as compared to the previous year, or a decline of 120 basis points if the impact of the adoption of the new revenue recognition standard is excluded. While the company expects the margin pressure to remain in the second quarter, its magnitude should be reduced.

4. 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 strong growth from its online and mobile channels in the first quarter, 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.

5. Optimizing Store Fleet: Gap Inc. has continued the process of optimizing its store count, including reducing its exposure to low productivity stores. The company has also seen an opportunity for increasing the store count of Athleta, Old Navy, and the factory and outlet expressions at the Banana Republic and Gap. The company noted traffic trends in 2017 that were better than the levels seen in the industry, and this trend continued in the first quarter

See our complete analysis for Gap Inc.


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