What To Expect From Gap’s Stock After Q1?

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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 first-quarter results on Thursday, May 26. We expect Gap’s stock to likely see little to no movement with revenue and earnings just meeting expectations. In 2021, Gap’s full-year revenue was up 21% year-over-year (y-o-y) and was nearly 2% above 2019’s levels. However, the company faced headwinds with supply chain issues weighing heavily on its performance in 2021, particularly driven by longer transit times from the West Coast port delays and the sudden and prolonged closure of factories in Vietnam. To avoid congested ports, Gap chose to ship a larger portion of its merchandise via air freight services. And, these more expensive shipping options also weighed on its profits in the second half of the year. We expect the supply chain issues fueled by the inflation and pandemic to continue to impact the company’s first-quarter results.

Gap also cut its Q1 net sales growth guidance to about low-to-mid-teens y-o-y declines, from its prior guidance of mid-to-high single-digit y-o-y declines. It cited execution challenges with the Old Navy business. The retailer’s Old Navy brand has been underperforming, with the company reporting muted net sales and flat comparable sales at the brand for Q4.

Our forecast indicates that Gap’s valuation is $10 per share, which is in line with the current market price. Look at our interactive dashboard analysis on Gap’s Earnings Preview: What To Expect in Q1? for more details.

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(1) Revenues expected to come in line with consensus estimates

Trefis estimates Gap’s FQ1 2022 revenues to be $4.5 Bil, in line with the market expectations. The company noted that factory closures spurred by coronavirus outbreaks and backlogs at ports have created a scenario where merchandise isn’t hitting shelves as fast as the retailer expected. For full-year 2022, we expect Gap’s revenues to fall 2% y-o-y to $16.4 billion. Gap expects FY22 revenue growth to be in the low single-digit range after recovering from a negative month (net loss) in Q1. GPS also expects to deliver an operating margin of 6.3% to 6.8% on a reported basis and 6.0% to 6.5% on an adjusted basis for the fiscal year.

2) EPS likely to be a match with consensus estimates

Gap’s FQ1 2022 earnings per share (EPS) is expected to come in at a loss of 14 cents per Trefis analysis, in line with the consensus estimate. The company swung from a larger loss of $665 million in 2020 (or -$1.78 per share) to a profit of about $256 million in 2021 (or $0.68 per share). This was impressive given that the company saw a 5% higher operating expense and a 10% rise in the cost of goods sold and occupancy expenses in 2021. These full year’s results give hope that the company is bouncing back from the dim days of 2020, although it still continues to face challenges in terms of supply chain headwinds.

(3) Stock price estimate similar to the current market price

Going by our Gap’s Valuation, with an EPS estimate of $1.36 and a P/E multiple of 7.0x in fiscal 2021, this translates into a price of $10, which is in line with the current market price.

It is helpful to see how its peers stack up. GPS Peers shows how Gap’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns May 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 GPS Return -24% -46% -58%
 S&P 500 Return -5% -17% 76%
 Trefis Multi-Strategy Portfolio -8% -23% 201%

[1] Month-to-date and year-to-date as of 5/25/2022
[2] Cumulative total returns since the end of 2016

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