Soft Performance Across Brands Weighs On Gap’s Q1 Results

by Trefis Team
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Gap Inc (NYSE: GPS) reported a weaker-than-expected performance for the first quarter late last week. The apparel giant missed street’s estimates due to a sizable reduction in comparable sales figures. Same-store sales were down 4% during the quarter, compared to a 1% gain in the year-ago quarter. Comparable sales for Old Navy Global and Banana Republic slid 1% and 3% respectively while Gap Global’s comparable sales dropped by 10%. Overall, net sales of the company declined 2% y-o-y to $3.7 billion, with adjusted EPS coming in at $0.24, well below the consensus estimate of $0.31 per share.

In light of the weak Q1 results, we have revised our price estimate for Gap Inc’s shares downward from $34 to $27. Our new price estimate remains about 40% ahead of the current market price. We have summarized our key expectations from the earnings announcement in our interactive dashboard – How Did Gap Inc Fare In Q1 and What Can We Expect From Full-Year 2019 ?  In addition, here is more Trefis Textiles, Apparel and Luxury Good Industry Data.

A Quick Look at Gap Inc’s Revenue Sources

Gap Inc reported $16.6 billion in Total Revenues in 2018. This included the following revenue streams:

  • Gap Global: $5.1 billion in FY 2018 (31% of Total Revenues). Gap global is one of the oldest apparels and accessories brands and its assortment includes denim, tees, button-downs, and khakis.
  • Old Navy: $7.8 billion in FY 2018 (47% of Total Revenues). Old Navy is a global apparel and accessories brand that makes affordable and high-quality products for all age groups.
  • Banana Republic: $2.5 billion in FY 2018 (15% of Total Revenues). Banana Republic is a global apparel and accessories brand that provides a wide range of products including clothing, eye-wear, jewelry, shoes, handbags, and fragrances.
  • Other: $1.1 billion in FY 2018 (7% of Total Revenues). This segment primarily consists of net sales for the Athleta, Intermix the Hill City brands.

Key Takeaways From Gap Inc’s Fiscal Q1

Gap Global’s Dwindling Fortunes Took Another Hit In Q1

  • Gap Global has struggled over the last five years, and has delivered negative comp growth over this period – a trend which carried over in Q1. The brand’s comp sales fell 10% in Q1 – worse than the 4% reduction in the prior year period, with total revenues declining by 12% y-o-y to $1 billion. Weakness across the brand can be attributed to operational headwinds in the business as well as to assortment issues. Moreover, the brand’s top line was negatively impacted by weather and traffic trends in the first quarter. Nevertheless, the brand’s profitability improved in the quarter thanks to an increase in gross margin from its ongoing efforts to cut costs.
  • Gap continues to work towards revitalizing the brand along with its restructuring efforts. The company closed more than 90 stores last year and expects to close an additional 130 stores by the end of 2019. In addition, the company remains focused on improving its inventory composition and product assortment.

Old Navy Still Holds The Key For Gap Inc’s Growth Till Its Spin-off

  • Old Navy’s comparable sales were down 1% in Q1 compared with a 3% increase in the previous-year quarter. Although, the brand’s revenue grew by 3% y-o-y to $1.8 billion, Old Navy continued to struggle due to its limited product offerings that lack diversity. These challenges were exacerbated by an overall soft apparel retail environment, which can be primarily attributed to an extended cold season.
  • However, online trends for the brand remained strong as the brand delivered double-digit comps growth in traffic and conversion during Q1 2019. Although, the brand’s performance did not meet expectations, the fundamentals for Old Navy remain strong and we expect this brand to continue to drive Gap’s growth in the near future as the brand continues to evolve itself according to the changing consumer habits to increase its market share and revenues.

Athleta Brand Continues To Thrive

  • The ‘Athleisure’ segment remains a major growth driver for the apparel industry. Despite the unseasonable cold spell, Gap’s Athleta continued to grow at a faster pace than the market. The brand delivered a sequential comp improvement in the first quarter and continued to improve its share of the market. Athelta has been Gap’s fastest-growing segment of late, and we expect the momentum to continue through 2019. Moreover, the company plans to open approximately 25 new Athleta stores in 2019 which should support the brand’s growth momentum.

Full-Year Outlook

  • For the full-year 2019, Gap expects its comparable sales be down in low single digits while diluted earnings per share are expected to be in the range of $2.04 to $2.14
  • Based on our full-year forecast, Gap Inc’s adjusted EPS for full-year 2019 is likely to be around $2.21. Using this figure with our estimated forward P/E ratio of 12.2x, this works out to a price estimate of $27 for the company’s shares, which is about 40% ahead of the current market price.

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