Gap Analysts React to Mixed Q1 Earnings: ‘Disappointed, but Not Surprised’

Pedestrians walk by the closed GAP flagship store in San Francisco on Aug. 18, 2020. Justin Sullivan/Getty Images

Gap Inc.on Thursday reported first-quarter earnings and cut its full-year profit guidance.

Gap reported a first-quarter adjusted EPS loss of 44 cents, missing consensus estimates of a 13-cent loss. Gap reported revenue of $3.48 billion, beating analyst expectations of $3.46 billion. Revenue was down 13 percent from a year ago.

Overall same-store sales were down 14 percent from a year ago, missing Wall Street’s estimate of a 12.2 percent drop. Gap store sales were down 11 percent, Old Navy same-store sales were down 22 percent and Banana Republic sales were up 27 percent.

Looking ahead, Gap reduced its full-year EPS guidance from a previous range of between $1.85 and $2.05 to a new range of between 30 cents and 60 cents.

Reset Year

Telsey Advisory Group analyst Dana Telsey said Gap has made tremendous progress in optimizing and streamlining its business in recent years, but the first-quarter numbers are a clear sign of just how much work must still be done to get all of Gap’s brands firing at the same time.

“Reflecting a difficult operating environment globally with macro and inflationary pressure, exacerbated by self-inflicted execution missteps at ON leading to the departure of the brand’s CEO, FY22 now appears to be a reset year for the business as it looks to stabilize ON and find new leadership, while managing through a difficult operating environment,” Telsey wrote.

Bank of America analyst Lorraine Hutchinson said Old Navy’s assortment problems likely won’t be solved until the second half of 2022.

“ON was also negatively impacted by an over-assortment of plus sizes in stores from its BODEQUALITY launch and a lack of fashion newness, with too much casual,” Hutchinson wrote.

More Guidance Cuts Coming?

Morgan Stanley analyst Kimberly Greenberger said Gap’s guidance cut may not be its last.

“Consistent mis-execution & a likely decelerating macro/industry headwinds leaves room for further negative revisions,” Greenberger wrote.

Credit Suisse analyst Michael Binetti said he is “disappointed, but not surprised” by Gap’s first-quarter numbers and guidance cut.

“With industry optics suggesting the low income consumer (ON’s core) is under pressure, we don’t expect an easy path to re-rating for the multiple soon,” Binetti wrote.

Ratings and Price Targets

Morgan Stanley has an Underweight rating and $8 target.

Credit Suisse has a Neutral rating and $10 target.

Bank of America has an Underperform rating and $9.60 target.

Telsey Advisory Group has a Market Perform rating and $13 target.

By Wayne Duggan

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