Gap Reports Q3 Beat, Announces Hundreds Of Store Closings: The Sell-Side Reacts

The sell-side parsed Gap Inc. GPS’s business plan for the fourth quarter after the retailer announced hundreds of imminent store closings alongside its third-quarter print this week. 

The Analysts

• Jefferies analyst Randal J. Konik reiterated a Buy rating and $50 price target.
• KeyBanc Capital Markets analyst Edward Yruma downgraded Gap from Overweight to Sector Weight.

Positives

In announcing the closing of more than 700 underperforming stores, Jefferies' Konik said in a Wednesday note that Gap “ripped off the Band-Aid.”

The store closures should eliminate "significant" losses, elevate the brand and allow the company to focus on high performers, the analyst said. 

Despite fabrication issues, Old Navy remains strong and is showing share gains and significant traffic, Konik said. 

KeyBanc's Yruma said Tuesday that both Old Navy and Athleta are often underappreciated within the company.

“95 percent of the Athleta business comped positively in 3Q, and the brand continues to see solid growth in its customer file. Within active, GPS launched a new brand in October called Hill City as it looks to grow in men’s active.”

Negatives

Overall, the Gap brand performed underwhelmingly, said Jefferies' Konik.

“Gap brand's comp fell short; however, as GPS undergoes fleet rationalization, this should improve substantially.”

Assortment struggles affected the data for this quarter, accounting for a loss of 7 percent, said KeyBanc's Yruma. 

“More importantly, GPS management signaled an openness to taking more drastic steps to cull the Gap specialty store fleet, citing that the bottom half of the fleet is a $100-million EBIT drag. Costly flagships could also be rationalized in an effort to improve profitability."

Twenty percent of Gap's sales are online, meaning that fleet rationalization "can be done in a brand-accretive manner," the analyst said. 

Price Action

Gap shares were up 0.7 percent at $25.99 at the time of publication Friday. 

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