The Gap's Solid Q3 Stained By Disappointing Q4 Guidance

Gap Inc GPS shares are down 10 percent on Friday as the market seems to be focusing more on the company’s disappointing Q4 guidance than its strong Q3 performance. Deutsche Bank analyst Paul Trussell isn’t surprised by the market reaction.

The Gap reiterated its full-year 2016 EPS guidance of $1.87-$1.92, which implies Q4 EPS in the $0.35-$0.40 range.

“While we acknowledge the company’s focus on improving its product model wnd supply chain capabilities, we expect the stock to trade down on disappointing 4Q guidance as visibility on long-term earnings growth remains low,” Trussell said.

Deutsche Bank sees four headwinds for Gap in Q4:

• Deceleration in traffic in November
• An increase in marketing spend
• Lapping Q4 2015 bonus reversals
• Costs associated with the 2017 opening of Times Square location

Trussell believes these headwinds will make it difficult for the Gap to expand its EBIT margins in the near future.

Deutsche Bank has lowered its 2016 EPS estimate from $2.03 to $1.90 on same-store sales growth of -2 percent. The firm has also lowered its 2017 EPS estimate from $2.27 to $2.12.

The firm maintains a Hold rating on the Gap and has lowered its price target for the stock from $25 to $23.