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Gap Stock Slumps on Guidance Cut, CEO Exit

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  • Gap stock fell about 6% in after-hours following management’s guidance cut.
  • The company also announced the exit of CEO Art Peck.

On November 7, Gap Inc (GPS) announced the departure of CEO Art Peck. Moreover, the beleaguered apparel company also lowered the full-year EPS guidance that irked investors. Also, Gap stock fell about 6% in the extended trading session following the news. Then, Gap announced that Robert J. Fisher would succeed Mr. Peck as an interim CEO.

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Gap’s guidance update

Besides announcing the departure of Mr. Peck, Gap provided comparable sales numbers for the third quarter. The company stated that third-quarter comparable sales are down 4%. Notably, comparable sales stayed flat during the corresponding quarter last year.

By brands, comparable sales or comps for Gap decreased by 7%. Last year, comps fell by 7% in the third quarter. Banana Republic’s comparable sales declined 3% in the third quarter as compared to a 2% growth last year. Comparable sales for Old Navy shrunk 4% as compared to 4% growth in the previous year.

Commenting on the third quarter, Teri List-Stoll, EVP and CFO of Gap Inc, said “This was a challenging quarter, as macro impacts and slower traffic further pressured results that have been hampered by product and operating challenges across key brands.”

Gap will announce its third-quarter earnings after the markets close on November 21. Continued weakness in sales and heightened promotional environment led management to cut full-year earnings outlook. Also, Gap expects 2019 adjusted EPS to be in the range of $1.70–$1.75. Previously, management expected adjusted EPS to be $2.05–$2.15.

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Lower traffic hurting Gap stock

Gap stock is taking a hit from the continued slump in traffic owing to the heightened competitive environment and uncertain macroeconomic conditions. Amid competitive headwinds, promotional activity remains elevated, which, in turn, takes a toll on profitability. Gap stock is down about 30% on a YTD (year-to-date) basis as of November 7.

During the last reported quarter, Gap’s top line shrunk by about 2%. Meanwhile, gross and adjusted operating margin contracted 90 basis points and 140 basis points, respectively. Comps fell 4% with a 5% decline in Old Navy, a 7% decrease in Gap, and a 3% decline in Banana Republic brands. Management blamed lower traffic and higher promotions for the sluggishness.

In comparison, stock prices of the company’s peers are taking a hit owing to heightened competition from online players. Shares of L Brands (LB) are down 29.6% on a YTD basis. Meanwhile, American Eagle Outfitters (AEO) stock is down about 14%. Also, apparel retailers are taking a hit on their stock. For instance, Macy’s Inc (M) stock fell by 45.5% YTD.

Gap stock: what’s on the horizon?

We think lower traffic, inventory challenges, and competitive headwinds will continue to hurt Gap stock in the near-term. Also, a shorter holiday season poses a threat. Several analysts lowered their price target on Gap stock following the guidance cut.

The Royal Bank of Canada or RBC lowered its price target from $19 to $16. Meanwhile, Evercore Inc. reduced the price target from $21 to $17. Citigroup now has a price target of $18, down from $19. JPMorgan Chase & Co cut it from $15 to $14.

Earlier in October, Credit Suisse Group AG downgraded Gap stock along with L Brands and Macy’s. Analysts expect Gap’s revenues and EPS to decline in the third quarter.

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