Gap Faces Holiday Uncertainty Heading Into Q4, Says Analyst

Gap Faces Holiday Uncertainty Heading Into Q4, Says Analyst
  • Telsey Advisory Group analyst Dana Telsey reiterated with a Market Perform rating on the shares of Gap Inc GPS and raised the price target from $10 to $15.
  • Gap reported Q3 FY22 adjusted EPS of $0.71 versus $0.27 last year, coming in above the consensus estimate of breakeven.
  • The earnings upside came from across-the-board outperformance, as sales, gross margin, and operating expenses all came in better than expected, said the analyst.
  • Sales increased across channels, with online up 5% in the quarter and store sales up 1% Y/Y.
  • He added that the timing of franchise sales and a pull-forward of demand from an ON holiday sales event in October also benefited the topline for the quarter.
  •  Merchandise margins in the third quarter were negatively impacted by higher discounting and inflated commodity price increases, partially offset by lapping higher air freight costs last year.
  • By brand, ON remained the laggard for the quarter with a 1% comp decline (versus a 9% decrease a year ago), but improved meaningfully from a 15% decline in the prior quarter.
  • BR led the way with 10% comp growth for the quarter (versus a 28% increase a year ago), improving from 9% growth in the prior quarter.
  • The company noted that Q4 sales could be down mid-single digits, below the current consensus estimate of roughly flat. 
  • The Gap brand faces a roughly 100-bp headwind as it anniversaries Yeezy Gap sales from a year ago.
  • Management is also taking a cautious approach to holiday given the uncertain macro backdrop and a competitive promotional environment.
  • The results mean that each brand showed sequential improvement in an encouraging sign that the organizational turnaround could be taking hold after a run of disappointing results over the past year. 
  • In addition, the company is aggressively managing costs while right-sizing its inventory position, Telsey cited.
  • The Q4 sales outlook came in below prior expectations as the company continues to plan cautiously in the face of a potentially challenging and promotional holiday season.
  • Price Action: GPS shares are trading higher by 4.68% at $13.305 on the last check Friday.
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