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Gap Stock Falls, Withdraws Guidance and Halts Dividends


Mar. 27 2020, Published 1:10 p.m. ET

Gap (NYSE:GPS) stock has fallen during the trading session today. The company announced that it will withdraw its guidance, halt its dividend, and cut expenses. On Thursday, Gap withdrew its guidance for fiscal 2020 (ending January). The company issued the guidance a few weeks ago. The decision was due to uncertainty about the coronavirus outbreak.

Like Gap, Target (NYSE:TGT) also withdrew its first quarter and fiscal 2020 guidance. In contrast, Walmart (NYSE:WMT) announced cash bonuses for all of its hourly employees in the US. The company plans to hire around 150,000 temporary workers in the US by the end of May amid the coronavirus panic.

Gap stock has fallen more than 11% during today’s session. The stock fell 5.9% on Thursday and closed the trading day at $8.45. The company’s returns have fallen more than 41% in March. So far, the company’s returns have fallen more than 51% YTD (year-to-date).

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Gap withdraws guidance, terminates dividend

On Thursday, Gap pulled its fiscal 2020 forecast, which was issued on March 12. On the same day, Gap announced its better-than-expected fourth-quarter and fiscal 2019 results. The company stated that it expected its fiscal 2020 comparable sales and net sales to grow by low-single-digits. Gap predicted an adjusted EPS of $1.80–$1.92 compared to $1.97 in fiscal 2019. During the fourth quarter, the company expected its sales to hit by roughly $100 million and its earnings to decline by $0.10 per share in the first quarter in Asia and Europe.

Besides, Gap also suspended its dividend program for the year. The company’s board authorized its first-quarter dividend of $0.2425 per share on March 4. The quarterly dividend was supposed to be payable on or after April 29 to shareholders of record as of April 8. In the fourth quarter, Gap paid a dividend of $0.2425 per share. The annualized dividend of $0.97 led to a payout ratio of 63.89%. Gap’s dividend yield was 11.48%. During the fourth quarter, Gap also suspended its share repurchases in 2020 due to the coronavirus pandemic.

The company stated that it would be drawing down its entire $500 million credit facility to weather the coronavirus crisis. Gap also announced that it will review and reduce expenses. The company plans to cut its capital expenses by about $300 million for fiscal 2020.

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Gap has temporarily closed all of its North American stores as of March 17. Previously, the company reduced store hours across its brands. Some other retailers like Macy’s (NYSE:M), Nordstrom (NYSE:JWN), and JCPenney have also announced temporary store closures. Kohl’s also trimmed its business hours due to the coronavirus pandemic.

According to Gap’s newly appointed CEO Sonia Syngal, the company has taken these precautionary measures to strengthen its liquidity and financial flexibility amid the coronavirus pandemic.

Moody’s downgraded the debt rating

To add to the woes, Moody’s downgraded the debt ratings on Gap late on Thursday. Moody’s downgraded Gap’s debt by two notches to Ba1 from Baa2. The rating agency stated that “the steady decline in Gap’s cash flow from operations and credit metrics as well as the anticipated disruption of the COVID-19 virus in the face of unprecedented temporary store and mall closures.” Notably, Moody’s expects Gap’s earnings to decline in 2020.

Moody’s also slashed Macy’s rating. The debt rating agency sees weakness in Macy’s credit profile. Moody’s thinks that the coronavirus could disrupt the company’s balance sheet.

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Gap’s Q4 performance

Gap’s net sales rose about 1% YoY to $4.67 billion in the fourth quarter. However, the comparable-store sales fell 1% in the quarter ending February 1 compared to analysts’ expectations of a decline of 3.8%. Last year, the comparable sales were -1%, while the sales fell 4% in the third quarter.

During the fourth quarter, Old Navy’s same-store sales were flat. The sales were also flat in the same quarter the previous year. Gap’s comparable sales fell 5% in the fourth quarter—the same as the fourth quarter of the previous year. The same-store sales at Banana Republic were flat in the fourth quarter compared to -1% in the year-ago quarter. Meanwhile, the comparable sales at Athleta rose 2% compared to positive 7% in the year-ago quarter.

Analysts’ recommendations

Among the 23 analysts covering Gap stock, 17 recommend a “hold,” while six recommend a “sell.” None of the analysts recommend a “buy.” Analysts have an average target price of $11.34 on the stock. The target price implies a return of 34.2% based on the closing price on Thursday.

Gap’s technical details

Gap stock’s 14-day relative strength index score of 35.29 shows that the stock is nearing the oversold territory. Currently, the stock is near its middle Bollinger Band level of $10.54, which suggests that the stock is neutral. Looking at the parameters discussed above, I don’t expect investors to invest in Gap stock right now.


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