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Can Soft Namesake Brand Hurt Gap's (GPS) Earnings Again in Q2?

Zacks Equity Research

The Gap, Inc. GPS is slated to report second-quarter fiscal 2019 results on Aug 22.

The company delivered positive earnings surprise in three of the last four quarters. However, earnings significantly missed the Zacks Consensus Estimate in first-quarter fiscal 2019. Consequently, the company has average negative surprise of 2.8% in the trailing four quarters. Let’s see how things are shaping up ahead of the upcoming release.

The Gap, Inc. Price and EPS Surprise


The Gap, Inc. Price and EPS Surprise

The Gap, Inc. price-eps-surprise | The Gap, Inc. Quote

How Are Estimates Faring?

The Zacks Consensus Estimate for second-quarter earnings is pegged at 52 cents per share, indicating a 31.6% decline from the figure registered a year ago. We note that the Zacks Consensus Estimate for earnings was revised downward by a penny over the last seven days. For quarterly revenues, the consensus mark stands at $4,018 million, implying a decline of 1.6% from the year-ago quarter’s reported number.

Factors at Play

Persistent softness across Gap’s namesake brand has been hurting its comparable store sales (comps), and overall top and bottom-line performance for a while a now. Weakness across the brand can be attributed to operational headwinds in its business and assortment issues. In first-quarter fiscal 2019, comps for the Gap brand fell 10%.

Moreover, the company’s total comps dipped 4% in the last reported quarter, with soft comps performance across all brands. Furthermore, Gap witnessed soft top line and comps due to extremely cold and wet weather that resulted in a slow start to business in February. Although traffic and business picked momentum in March and April, it was difficult to overcome the softness encountered in February. Additionally, late spring breaks, a shift in Easter, and delayed and lower tax refunds impacted the top line. We expect the headwinds, arising from softness in the Gap brand as well as the overall industry, will continue to reflect in the upcoming quarterly release.

Like many of its peers, the company has also notified that the Trump administration’s recently announced intent to increase tariffs imposed on clothing goods produced in China may impact results going forward. Gap stated that its current guidance incorporates impacts of List 3 goods but does not include any potential tariff impacts of List 4 goods.

For fiscal 2019, the company anticipates comps to be down in a low-single digit compared with the previously mentioned flat to up slightly. Furthermore, it now envisions earnings per share of $2.04-$2.14 for the fiscal year, down from $2.11-$2.26 stated earlier. Adjusted earnings are estimated to be $2.05-$2.15, down from the prior projection of $2.40-$2.55 and $2.59 earned in fiscal 2018.

Notably, management remains on track to revitalize the Gap brand by streamlining its specialty fleet and renewing marketing model to enhance customer engagement. In relation to streamlining specialty fleet, it expects to shut down roughly 230 stores in the next two years. This is likely to result in a sales decline of nearly $625 million annually.

Moreover, management estimates pre-tax costs of $250-$300 million. Also, these restructuring measures are likely to generate annualized pre-tax savings of nearly $90 million. These actions will lead to about 40% of sales from online while 60% will come from the specialty and value channels.  In fiscal 2019, Gap anticipates to shut down nearly 130 stores as part of the restructuring of the Gap brand fleet.

Although these efforts appear promising, the return of the brand to profitability is not anticipated in the near future. Moreover, lost sales from store closures and higher expenses might weigh on the overall profitability. This indicates that the fiscal second quarter will bear impacts of a soft Gap brand as well as initiatives to revive the brand.

Zacks Model

Our proven model does not conclusively show that Gap is likely to beat earnings estimates in second-quarter fiscal 2019. This is because a stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Gap currently has a Zacks Rank #4 (Sell) and an Earnings ESP of -5.35%, which makes surprise prediction impossible. We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Likely to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Burlington Stores, Inc. BURL has an Earnings ESP of +0.35% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Target Corporation TGT has an Earnings ESP of +1.04% and a Zacks Rank #2.

Ross Stores, Inc. ROST has an Earnings ESP of +1.79% and a Zacks Rank #3.

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The Gap, Inc. (GPS) : Free Stock Analysis Report
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