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Will Gap Beat Earnings in 1Q?

Zacks Equity Research

Gap Inc. (GPS) is set to report first-quarter fiscal 2013 results on May 23. Last quarter the company surpassed expectations. Let’s see how things are shaping up for this announcement.

Recent Growth Drivers

Gap’s fourth-quarter earnings were 65.9% higher than the year-ago quarter. The earnings upside mainly resulted from solid sales and comps performance at the company’s stores. The company’s comps benefited from the continued positive trend in its North American businesses, which include Gap, Banana Republic, and Old Navy.

We note that Gap, which has transitioned through a phase of decreasing comparable-store sales and reduced profitability, is now set for growth, riding on its turnaround strategies as evident from its solid comps and sales performance in fiscal 2012 and fiscal 2013 so far.

This was clearly evident from Gap’s recently reported monthly and first-quarter comps results, wherein comps for April rose 7% while first-quarter fiscal 2013 comps were up 2%. Positive results were primarily driven by strong results at its namesake Gap and Old Navy stores. Moreover, net sales for April and the first quarter jumped 5% and 7%, respectively, to $1.21 billion and $3.73.

Based on strong sales results, the company expects first-quarter fiscal 2013 earnings per share in the range of 68–69 cents, compared with the reported year-ago quarter number of 47 cents. The current Zacks Consensus Estimate is 69 cents per share.

Earnings Whispers?

Our proven model does not conclusively show that Gap is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: ESP for Gap is 0.00%, since the Most Accurate Estimate stands at 69 cents, which is in line with the Zacks Consensus Estimate.

Zacks Rank #2 (Buy): Gap’s Zacks Rank #2 (Buy) has little effect on the predictive power of ESP because the Zacks Rank #2 when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows that they have the right combination of elements, i.e., a positive Zacks Earnings ESP and a Zacks Rank #1, #2 or #3.

Foot Locker Inc. (FL) with an Earnings ESP of +2.30% and a Zacks Rank #2 (Buy).

Zumiez Inc. (ZUMZ) with an Earnings ESP of +8.33% and a Zacks Rank #2 (Buy).

Fifth & Pacific Companies Inc. (FNP) has an Earnings ESP of +10.00% and a Zacks Rank #3 (Hold).

Read the Full Research Report on ZUMZ

Read the Full Research Report on GPS

Read the Full Research Report on FL

Read the Full Research Report on FNP

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