Gap’s Earnings: Is Disappointment ahead for Q3?

Gap Inc. (GPS) plans to announce its third-quarter earnings after the markets close on November 21. Wall Street expects the company to disappoint with respect to its Q3 sales and earnings. Analysts expect Gap to post revenues of $3.96 billion, down 3.3% YoY (year-over-year). Weak sales across all brands are expected to hurt its top-line growth.

Analysts expect Gap to post adjusted EPS of $0.51, down about 26% on a YoY basis. Lower sales and margin contractions are likely to affect Gap’s third-quarter earnings. Notably, Gap is struggling to lift its sales amid a heightened competitive environment. More frequent promotions are taking a toll on its margins and EPS.

During the last reported quarter, Gap’s revenues decreased about 2% YoY. The decline in Gap’s sales resulted from the lower comparable sales (or comps) across all brands. Comparable sales decreased 4% YoY, reflecting a decline of 5% in its Old Navy division. Meanwhile, comps at the Gap and Banana Republic brands fell 7% and 3%, respectively. Their gross and operating profit margins fell by 90 basis points and 140 basis points, respectively.

On November 7, Gap reported preliminary sales numbers for the third quarter and cut its EPS outlook for fiscal 2019. Gap stated that comps fell 4% in the third quarter, subdued by lower traffic amid a heightened competitive environment.

Sluggishness continued in the company’s namesake brand, and these comps fell 7% in the third quarter. Meanwhile, its Banana Republic and Old Navy brands decreased 3% and 4%, respectively.

Gap also reduced its earnings outlook for fiscal 2019. Gap expects its adjusted EPS to be $1.70–$1.75 in 2019. Previously, its adjusted EPS forecast was $2.05–$2.15. As for the third quarter, Gap expects its adjusted EPS to be $0.50–$0.52.

The company is taking a hit from weak traffic. Management points to the heightened competitive activity and unfavorable macroeconomic conditions as driving its slump in traffic. Meanwhile, weak sales and higher promotional activity affected its bottom line.

The company’s management also announced the exit of CEO Art Peck. Robert J. Fisher succeeded Peck as the company’s interim CEO.

Sluggish sales numbers, guidance cuts, and the CEO’s exit didn’t sit well with investors and analysts. Several analysts cut their price target on Gap stock before its third-quarter earnings. Analysts made the following downward revisions:

• Morgan Stanley cut the price target for Gap stock to $14 from $15.
• MKM Partners reduced its price target to $15 from $18.
• Riley FBR lowered it to $18 from $20.
• Jefferies cut the GPS price target to $29 from $37.
• Wedbush reduced its price target to $18 from $20.
• J.P. Morgan decreased it to $14 from $15.
• Telsey Advisory now has a target price of $19 from $24 for GPS stock.
• Citigroup lowered its price target to $18 from $19.
• RBC cut the price target for GPS to $16 from $19.
• Evercore ISI reduced its price target to $17 from $21.

Analysts have an average price target of $16.80 on GPS stock, implying a downside of 5.3% based on its closing price of $17.74 on November 15.

Sixteen of 24 analysts suggest a “hold” on GPS stock before its third-quarter earnings. Moreover, six analysts recommend a “sell,” and two analysts recommend a “buy.” Gap stock was down about 31% on a year-to-date basis on November 15. Moreover, its stock has underperformed the broader markets by a wide margin as the S&P 500 rose 24.5% year-to-date.