U.S. Markets open in 1 hr 17 mins

Gap Stock Loses 21% in 3 Months: Is it Likely to Turnaround?

Zacks Equity Research

The Gap, Inc. GPS has been in the doldrums for quite some time, thanks to persistent softness at its namesake brand. We note that the brand has been witnessing traffic challenges as well as operational headwinds across the business. This has been hurting the company’s total comparable sales (comps) and top-line performance.

Although the company has lost 21.1% in the past three months, it fared better than the industry’s 25.5% decline. The stock’s decline can be attributed to disappointing results in second-quarter fiscal 2019, wherein both the top and bottom line declined year over year.

Despite reporting an earnings beat in the fiscal second quarter, shares of the company declined 4.7% after it released quarterly results on Aug 22. Moreover, the soft top-line trend persisted in the quarter. With this, Gap’s revenues fell short of the Zacks Consensus Estimate for the third consecutive quarter.



However, Gap’s earnings surprise trend remains impressive, with a beat in eight of the trailing 10 quarters. Furthermore, its solid omni-channel endeavors and robust brand strength might help the company bring back its lost shine.

Let’s Delve Deeper

As stated earlier, softness at the Gap brand persisted in the fiscal second quarter, with a 7% comps decline, wider than a 5% fall in the year-ago quarter. Encouragingly, management is taking actions to revitalize this brand by streamlining its specialty fleet and enhancing marketing model to drive customer engagement. In relation to streamlining specialty fleet, it expects to shut down roughly 230 stores by fiscal 2020. This will result in sales decline of nearly $625 million annually. In fiscal 2019, it anticipates to shut down nearly 130 stores. However, we expect the brand to take some time to return to profitability.

Weak comps due to lower traffic and adverse foreign currency translations weighed on the company’s sales in the fiscal second quarter. Comps decreased 4%, with a decline across each of the company’s brands. Also, the quarter witnessed lower sales and soft margins as well as deleveraged SG&A expenses. While gross margin contracted 90 basis points (bps) mainly due to lower merchandise margin, adjusted operating margin shriveled 140 bps.

Consequently, Gap continues to anticipate comps decline in the low-single digits range for fiscal 2019 owing to challenging traffic trends. Furthermore, the company now envisions earnings per share of $1.88-$2.08, down from $2.04-$2.14 projected earlier. Adjusted earnings are estimated to come in at $2.05-$2.15, significantly down from $2.59 earned in fiscal 2018.

Strategic Endeavors Might Aid a Turnaround

Gap is enhancing its e-commerce and omni-channel capabilities by adopting a number of initiatives. Evidently, the company has increased online presence across all of its brands. In fact, Gap’s online division is one of its most profitable segments with robust sales growth. Apparently, the company has rolled out the Buy Online Pick up in Store (BOPIS) for its Old Navy brand throughout the nation, which is receiving a positive response from customers.

Recently, Gap’s iconic brand, Banana Republic, announced plans to launch Style Passport for its women's apparel collection at the end of September in the United States. This is an online service, wherein subscribers are allowed to rent the brand’s products for a flat monthly fee with choices to keep and purchase the items. The company is likely to launch this service for men's apparel range later on. Furthermore, Banana Republic will provide BOPIS facility beginning this fall. Impressively, this latest service is expected to reach out to more customers, helping the company to collect exclusive and valuable shoppers’ insights.

Meanwhile, Gap’s Old Navy brand, which is focused on creating affordable high-quality fashion for the whole family, is a significant long-term growth opportunity for the company. Additionally, Gap has been experiencing significant progress in its smaller brands. It also continues to benefit from the Janie and Jack clothing brand, backed by roughly 140 U.S. locations and a profitable online channel. Furthermore, the company remains focused on its growth brands, with more store openings for Athleta, Old Navy and Gap China locations.

These apart, Gap’s spin-off plans of splitting into two independent public companies, Old Navy and the yet-to-be-named company, are an added positive. Management expects this spin-off to enable these two stand-alone companies to strategically focus on their initiatives and operating structure in order to capitalize on growth opportunities.

Currently, Gap carries a Zacks Rank #3 (Hold).

3 Better-Ranked Retail Stocks

Boot Barn Holdings, Inc. BOOT delivered average positive earnings surprise of 26.1% in the trailing four quarters. Currently, the stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fossil Group, Inc. FOSL delivered positive earnings surprise of 79% in the last four quarters. The stock has a Zacks Rank #2 (Buy).

Ulta Beauty, Inc. ULTA has an expected long-term earnings growth rate of 18.4% and a Zacks Rank #2.

Today's Best Stocks from Zacks
 
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.

This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.