2 Analysts Weigh In On Gap's Awful Q1

Gap Inc GPS shares are reeling after reporting a first-quarter earnings and sales miss on Thursday.

Adjusted EPS came in at 24 cents, missing analyst estimates by 8 cents. Sales of $3.7 billion came in slightly below estimates.

Worse Than Expected

Bank of America analyst Lorraine Hutchinson said first-quarter results were significantly worse than expected and is skeptical in the value creation from spinning off Old Navy.

“We see risk to second half gross margins as the industry is over-inventoried and we are not confident that Old Navy’s issues are fixed,” Hutchinson wrote in a note.

The analyst was surprised with the announcement of 10 additional Old Navy and Athleta locations planned for FY2019 and Gap’s plan to repurchase $50 million of stock quarterly throughout the year.

“Given deteriorating fundamentals, we do not view this as a prudent use of capital,” she said.

Bank of America reiterated an Underperform rating and lowered its price target from $24 to $15.

Remaining On The Sidelines

Wedbush analyst Jen Redding said the slowing demand at Old Navy couldn't come at a worse time as it calls into question the likelihood and valuation of its spin-off.

“That said, according to management, business trends improved across all brands as weather turned seasonable in March and April, and we see continuing improvement in 2QTD as promotional trends ticked down y/y in late April, and now into May,” Redding wrote in a note.

The analyst remains on the sidelines for now as she optimistically awaits greater visibility and could become more constructive on Old Navy as a standalone business and U.S.-focused retailers, but sees more efficient uses of capital in the short term.

Wedbush maintains a Neutral rating and lowered its price target from $23 to $19.

Price Action

Gap shares are down 10.8 percent, trading at $18.39 at time of publication Friday afternoon.

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