Gap's Growing Pains: Analyst Eyes Fiscal Woes Despite Savvy Cost Management

  • Telsey Advisory Group analyst Dana Telsey reiterated a Market Perform rating on the shares of Gap, Inc. GPS, with a Price Target of $13.
  • Gap is scheduled to report its first quarter (ended April) earnings results after the market close on Thursday, May 25.
  • The analyst notes that Gap is working to fix issues across the brand's assortment; however, the product misses are expected to weigh on its unit Athleta's growth in the near term. At Athleta, sales fell 0.7% Y/Y in the fourth quarter.
  • The analyst sees the sale of Gap China to Baozun, which was completed at the beginning of last year, will account for a 200-bps headwind in Q1, as noted by the management. 
  • Additionally, FX is expected to weigh on Q1 by ~100 bps.
  • The analyst sees Gap's 1Q23 EPS of loss $0.11 vs. $0.44 loss last year, with total sales decreasing 5.1% Y/Y to $3.30 billion.
  • On the bullish side, Dana applauds Gap's cost management techniques. The company is renegotiating its advertising agency contracts, which will generate $75 million in estimated savings this year. 
  • Gap is also reducing its spending across technology, operating costs, and rationalized investments, which is expected to generate $50 million in estimated savings.
  • Considering these, Dana sees 70 bps of gross margin expansion to 35.2% in Q1, with 450 bps of operating margin expansion Y/Y to 1.2% loss.
  • Price Action: GPS shares are trading higher by 2.19% to $7.95 on the last check Monday.
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