Gap's Growth Outlook Is Tough

Gap Inc GPS reported its Q2 adjusted EPS ahead of the guidance, while the revised F2016 guidance was slightly below consensus.

Baird’s Mark R. Altschwager maintained a Neutral rating on the company, while raising the price target from $24 to $27.

Stock Range Bound

“The apparel environment is challenging and execution has been mixed across the major banners–clouding visibility into any meaningful inflection,” Altschwager mentioned.

The analyst believes that expense management was “notable,” while comparisons were expected to ease in H2. However, the stock was expected to remain range bound till Gap demonstrates a more consistent momentum for its top line.

Related Link: Gap Reports Weak Same-Store Sales And Guidance; Analysts May Point To The Weather

Q2 Results

The company reported its adjusted-EPS for Q2 at $0.60, slightly above the high end of the guidance.

“By brand, Old Navy led the fleet with ~flat comps and good merchandise margin performance. Gap brand sequentially improved on a two-year basis and management continues to highlight flickers of life in the assortment,” Altschwager stated.

However, the analyst pointed out that improvement has been slow, while management continues to be hesitant to commit to a timeline for a return to comp growth.

Outlook

Gap revised its F2016 guidance, with adjusted EPS of $1.87-$1.92, marginally below the consensus forecast.

According to the Baird report, “The industry backdrop, while still sluggish, looks better in the back half with easier sales/margin comparisons, leaner inventory, and potential for more normal seasonal weather patterns to spur traffic.”

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