Retail

Why Gap Could Still Face Even More Downgrades

Paul Ausick

Published: May 15, 2016 10:25 am

Last Updated: January 13, 2020 8:02 am

Gap Inc. (NYSE: GPS) does not report first-quarter earnings until Thursday, May 19, but the stock was mauled after the company reported same-store sales numbers after markets closed last Monday. The company got no help from other retailers reporting quarterly results last week because none showed any signs of life.

Same-store sales in April dropped 7%, compared with a forecast 1.1% increase from research firm Retail Metrics. Gap said that earnings would range around $0.31 to $0.32, well below the $0.44 consensus.

Particularly distressing to analysts and investors alike was the company’s failure to deliver on a promised turnaround this spring. CEO Art Peck seemed surprised: “Our industry is evolving and we must transform at a faster pace, while focusing our energy on what matters most to our customers.” Did Gap just notice?

The company has been cutting costs and reducing debt for a while now, but it may have reached the limit of what these moves can do. Analysts are wary, but they haven’t yet given up on Gap yet. Oppenheimer, for instance, has a Perform rating on the stock, but lowered its price target from $24 to $20:

[Gap]’s negative comp trajectory is continuing into ’16, with Gap division seeing similar trends sequentially (Spring was expected as time for “no excuses” with the turnaround) and Old Navy decelerating further. Decision to streamline the model likely aided by expense cushions starting to run out (SG&A is down over $100M since ’12; focus on debt paydown reduces FCF for buyback); Fisher family ownership (45% of shares, 2 Board seats) could provide some downside protection to the stock.

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