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Gap reported quarterly earnings of 25 cents per share, which missed the analyst consensus estimate of 32 cents by 21%. Sales of $3.994 billion beat the $3.82 billion estimate.
The Analysts: Morgan Stanley analyst Kimberly Greenberger maintains an Equal-Weight rating on Gap's stock with a $25 price target.
Credit Suisse analyst Michael Binetti maintains an Underperform rating on Gap with a price target lifted from $19 to $23.
'Diminished Visibility': Gap "handily" exceeded top line and gross margin estimates in its third-quarter report but marketing-driven SG&A costs more than offset the revenue and margins upside. Specifically, Greenberger said SG&A came in at $1.45 billion versus expectations of $1.26 billion due to higher marketing investments across all brands, heightened health costs and deleverage associated with store closures.
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Greenberger said management deserves credit for its focus on gaining market share through higher marketing spending and dedication towards offering customers a safe shopping experience, but the elevated SG&A spend "diminishes near-term visibility" on margin recovery and could put into risk management's 10% 2023 EBIT margins guidance.
The near-term headwinds and unclear outlook imply Gap's stock could give back some of its 120% post-first quarter gains, the analyst wrote. This could remain the case until investors "gain confidence" that SG&A can "become a point of leverage for the business."
Growth Plans 'Come With A Cost': Gap showed investors "solid" sales and gross margins although flow-through was "unexpectedly weak" as more near-term investment in marketing impacted EPS, Binetti wrote in a note.
Gap's Analyst Day presentation in late October prompted the Street to "quickly" embrace management's path to at least $3 per share of EPS on EBIT margins approaching 10% by 2023, the analyst wrote. But Gap's report coupled with management's comments that marketing could remain elevated questions the company's ability to achieve these targets.
GPS Price Action: Shares of Gap were trading lower by nearly 20% at $21.85.
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