Gap reported second-quarter EPS of $0.60, better than the consensus view of $0.59, driven by better-than-expected gross margin and merchandise margin. The company updated FY16 guidance to be $1.87–1.92 (versus the Street's $1.96).
"GPS is playing good defense with an aggressive restructure/store closure plan, but SG&A cuts are getting harder to come by (given multiple years of cost control) and traffic (which is the key variable impacting margins) remains volatile," analyst Michael Binetti wrote in a note.
Binetti posited whether allocation of marketing budgets toward Old Navy signals waning confidence in the near-term strategy for core Gap and Banana Republic.
"While SSS trends don't seem to be worsening, there is still low visibility on Gap and BR's ability to pullback on promos and see a comp inflection. Given the volatile retail environment and need for more confidence/clearer metrics to suggest a sustained improvement in product, we maintain our cautious view for 2H," Binetti added.
At time of writing, shares of Gap were up 4.02 percent on the day at $26.92. Binetti has a price target of $16.
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