Earnings Preview for the Gap

The Gap GPS is expected to announce its Q1 earnings results on Thursday, May 19, after the markets close. Analysts expect earnings per share to reach $0.39, or 13.3% lower than in the same quarter last year. The Street's estimate was lowered by $0.01 in the last 30 days, however. Revenues are expected to stand at $3.29 billion, or 1% below the level recorded in Q1 last year. The Gap is a global specialty retailer offering clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. Looking ahead, analysts expect earnings per share and revenues to recover slightly year-over-year. In the upcoming quarter, earnings per share should stand at $0.36, the same as in Q2 last year. For the whole year, Gap is expected to post earnings of $1.83 per share, or 2.7% below the 2010 level. Gap's Q2 revenues are projected to reach $3.37 billion, or an increase of 1.5% over the same quarter last year. For the whole year, revenues should be $14.89 billion, or 1.5% ahead of last year's value. Some investors will be worried after Gap estimated earnings for the April quarter below analysts' expectations and said merchandise margins were down significantly due to high raw materials costs. Gap expects diluted earnings per share to be in the range of $0.38 to $0.39. According to Reuters Estimates, analysts on an average were expecting Gap to report earnings per share of $0.40 for first quarter of 2011. On Tuesday, Gap's CEO Glenn Murphy has stressed his company needs to show more consistency. Speaking at Gap's annual shareholder meeting in San Francisco, Mr. Murphy said, "We have to be more of a consistent performer." As a part of its restructuring process, Gap will combine its international operations into one division, based in London. It also plans to open its first Old Navy store in Japan by the end of 2012. Analysts feel less and less optimistic about Gap's stock, however. In the last seven days, three rating agencies downgraded their rating on Gap. Raymond James analysts downgraded the Gap from an Outperform to a Market Perform rating. Caris & Company now has an Above Average rating, down from Buy. Citigroup analysts cut their price target on Gap's shares from $25.00 to $22.00. They now have a Hold rating on the stock. Some investors will be more confident about Gap's long term outlook following strong Q1 performance from a number of clothing retailers, including Macy's M and Abercrombie and Fitch ANF. A recent KPMG's survey of 152 chief financial officers and other financial executives in the retail sector showed that most of financial executives expect demand to rebound this year. Only 24% of retailers around the world expect significant improvement in their financial performance over 2010, however, while 51% predicted some improvement in financial performance, and 9% forecast a decline. In today's trading, Gap added 0.61% to its value and is currently standing around $23.13. In the last month, Gap's shares moved 6.15% higher.