Gap Inc. stock (NYSE: GPS), a specialty retailer selling casual apparel, accessories, and personal care products for men, women, and children under the Gap, Old Navy, and Banana Republic brands, is scheduled to report its fiscal fourth-quarter results on Thursday, March 4. We expect Gap stock to trade lower due to weak fiscal Q4 2020 results with revenues likely coming in line and earnings missing consensus. While the digital transition and cost-cutting initiatives are looking good for the retailer’s margins, the top-line declines remain a key issue in the near term.
Our forecast indicates that Gap’s valuation is around $23 a share, which is 10% lower than the current market price of around $26. Look at our interactive dashboard analysis on Gap’s Pre-Earnings: What To Expect in Q4? for more details.
(1) Revenues expected to be in line with consensus estimates
Trefis estimates Gap’s FQ4 2020 revenues to be $4.66 Bil in line with the market expectations. In Q3, the company’s net sales were flat y-o-y, and comps were up 5%. The highlight was digital sales increasing 61% y-o-y, offsetting a 20% drop in store sales. In fact, its online channel had 3.4 million new customers, a 145% increase over the prior year, which also made 40% of its total sales mix. As usual, Old Navy and Athleta brands posted the company’s best performances, growing by 17% and 35%, respectively. However, Banana Republic’s sales fell 30% and The Gap brand’s sales declined 5%. Online sales contributed to over 40% of company sales during this period. In the upcoming Q4, Gap expects sales to be equal to or slightly higher than last year in Q4. Higher shipping costs will fully offset the benefit from store closures, keeping gross margins roughly flat. For full-year 2020, we expect Gap’s revenues to decline 14% y-o-y.
2) EPS likely to be below consensus estimates
Gap’s FQ4 2020 earnings per share (EPS) is expected to be $0.12 per Trefis analysis, 33% below the consensus estimate of $0.18. In the upcoming Q4, the retailer expects operating expenses to range between 33% to 34% of sales (compared to just 30.3% of sales in the year-ago period). This will be driven by higher shipping costs, elevated marketing spends, and pandemic-related costs that will likely continue to weigh on the company’s profitability. For the full-year, we expect the company’s earnings to post a loss.
(3) Stock price estimate lower than the current market price
Going by our Gap’s Valuation, with a revenue per share (RPS) estimate of around $37.23 and a P/S multiple of 0.6x in fiscal 2020, this translates into a price of $23, which is 10% lower than the current market price of roughly $26.
While GPS stock could trade lower post Q4 release, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for TJX vs Abiomed.