The Gap, Inc. (GPS has been in rough waters for a while now due to persistent softness at the namesake brand. The brand has been witnessing operational headwinds across its business owing to assortment issues, which are denting its performance. This has also been hurting the company’s comparable sales (comps) and top-line performance.
All these weighed upon the company’s first-quarter fiscal 2019 results, wherein earnings and sales missed the Zacks Consensus Estimate and declined year over year. Management also lowered its earnings outlook for fiscal 2019. (Read: Gap Q1 Earnings & Sales Miss, FY19 View Cut)
Consequently, the Zacks Consensus Estimate has been witnessing a downtrend. We note that estimates for current and next year have moved south by 36 cents and 39 cents, respectively, to $2.07 and $2.16 over the past 30 days.
In the past three months, shares of this San Francisco, CA-based company tumbled approximately 26%, wider than the industry’s decline of 15.2%. Let’s take a look at what’s ailing this Zacks Rank #4 (Sell) stock.
Reasons Behind Gap’s Dismal Run
Gap’s namesake brand has been in soup for quite a while now due to issues at its merchandises. During first-quarter fiscal 2019, comps for the Gap brand fell 10% wider than comps decline of 5% and 4% in the previous and year-ago quarter, respectively. We note that the brand has been witnessing operational headwinds across its business as well as assortment issues.
While management remains on track to revitalize the Gap brand by streamlining its specialty fleet and renewing marketing model to enhance customer engagement, these actions should attract significant costs and also continue to weigh on top-line growth. 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 sales decline of nearly $625 million annually. Moreover, management estimates pre-tax costs of $250-$300 million.
Nevertheless, 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 related to 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.
For fiscal 2019, the company anticipates comps to be down low single digits compared with the prior projection of 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 expected earlier. Adjusted earnings are estimated to come in at $2.05-$2.15, down from the prior projection of $2.40-$2.55 and $2.59 earned in fiscal 2018.
A Ray of Hope
The company’s efforts to boost digital and mobile offerings alongside improving product acceptance are encouraging. The company’s online division is one of its most profitable segments with robust sales growth. Notably, robust online trends in first-quarter fiscal 2019 led to high-teen comps growth driven by increase in traffic and conversion.
Apparently, Gap has rolled out the Buy Online Pick up in Store (BOPIS) for its Old Navy brand throughout the nation, which is receiving positive response from customers. Previously, the company expanded omni-channel endeavors like the “find-in-store”, “Reserve-in-Store” and “Order in Store” capabilities across various stores.
These initiatives, combined with constant digital investments should boost Gap’s top line and profitability. Moreover, we believe the company’s plans to spin-off into two companies will help management to better focus on growth initiatives and improve operating efficiency.
Though the aforementioned efforts reflect steps taken in the right path, these will take time to yield results and win back investors’ confidence. Meanwhile, the current dismal performance remains a trouble for the stock.
3 Stocks to Watch
The Children's Place, Inc. PLCE has a long-term earnings growth rate of 8% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
L Brands, Inc. LB delivered average positive earnings surprise of 11% in the trailing four quarters. It carries a Zacks Rank #2 (Buy).
Stitch Fix, Inc. SFIX has a long-term earnings growth rate of 8% and a Zacks Rank #2.
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