An Analyst's Q1 Review Of Gap, Express

Gap Inc GPS and Express, Inc. EXPR recently reported first-quarter results, which prompted MKM to lower its fair value estimates for both names.

The Analyst

MKM Partners' Roxanne Meyer maintains a Neutral rating on Gap with a fair value estimate lowered from $33 to $18.

The analyst also maintains a Neutral rating on Express with a fair value estimate lowered from $4.50 to $3.

Gap: Old Navy Breakup In Focus

Gap earned 24 cents per share in the quarter, which missed expectations of 32 cents per share while the Old Navy brand recorded a "disappointing" negative comp, Meyer wrote in a note. The company ended the quarter with heightened inventory, which could pose a problem in the second quarter.

Even if Old Navy remains the "gem" brand, Meyer said the softness seen in the quarter will likely add concerns over the pending separation. In fact, some of Old Navy's rivals in the value category "got it very right" in the first quarter which may imply execution issues at the brand.

Management may need to make the "tough decision" to at least terminate the adult business at the core Gap brand, according to Meyer. The adult business "isn't relevant" and it's not clear who the core customer is.

Express: Overhang And Opportunity

Express reported a first-quarter beat but inventory rose 2.9 percent while sales declined 6 percent, Meyer said. The second quarter could prove to be highly promotional and impact margins and EPS.

Tops are likely to remain a key overhang, which Meyer said may be a concern as this is where the company differentiates from its peers. New tops are undergoing testing but are unlikely to have any notable impact until the fourth quarter of 2019, if not in 2020.

On the other hand, Express as an opportunity to exit some categories that aren't performing well, including swim and watches.

Related Links:

2 Analysts Weigh In On Gap's Awful Q1

These Analysts Remain Sidelined On Express