Gap Q2 Earnings: What Are We Watching?

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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 second-quarter results on Thursday, August 24. We expect Gap’s stock to likely see little to no movement with revenue and earnings matching expectations in fiscal Q2. We expect inflationary headwinds, sluggish sales, and size and assortment problems to continue to negatively impact the company’s second-quarter results. For the full year 2023, Gap continues to anticipate that net sales could decrease in the low-to-mid-single-digit range compared to last year’s net sales of $15.6 billion. As a reminder, the sale of Gap China to Baozun closed on January 31, 2023. That means FY 2022 net sales included approximately $300 million in sales for Gap China. However, Gap’s FY 2023 will include a 53rd week estimated to positively impact net sales by $150 million. It should be noted that a long search has led to the appointment of Richard Dickson as the president and CEO of the specialty apparel company from August 22, 2023.

Notably, GPS stock had a Sharpe Ratio of 0 since early 2017, which is much lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Our forecast indicates that Gap’s valuation is $10 per share, which is almost in line with the current market price. Look at our interactive dashboard analysis on Gap’s Earnings Preview: What To Expect in Q2? for more details.

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

Trefis estimates Gap’s FQ2 2023 revenues to be $3.6 Bil, matching the market expectations. In Q1, Gap’s revenue fell 6% y-0-y to $3.28 billion on a 3% drop in comparable sales. The company’s 8% comps decline at Banana Republic and a 1% drop at Old Navy more than offset a 1% rise at Gap brand. Also, its store sales decreased by 4% y-o-y and online sales fell by 9% y-o-y (and represented 37% of total sales) in Q1.

2) EPS likely to match consensus estimates

Gap’s FQ2 2023 earnings per share (EPS) is expected to come in at 9 cents per Trefis analysis, in line with the consensus estimate. The company’s net loss narrowed to $18 million, or 5 cents per share, from $162 million, or 44 cents a share, in the year-earlier period. On an adjusted basis, the company reported earnings of $3 million, or 1 cent per share in Q1 2023. The company’s adjusted operating margin grew by more than 600 basis points compared to the same time last year. This was due to a large improvement in gross margin caused by the reduction of excessive air freight costs, better advertising activity, and adjusted SG&A leverage.

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

Going by our Gap’s Valuation, with a revenue per share (RPS) estimate of $41.88 and a P/S multiple of 0.3x in fiscal 2023, this translates into a price of $10, which is almost similar to 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.

Returns Aug 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 GPS Return -7% -15% -57%
 S&P 500 Return -4% 14% 96%
 Trefis Reinforced Value Portfolio -7% 28% 556%

[1] Month-to-date and year-to-date as of 8/23/2023
[2] Cumulative total returns since the end of 2016

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