Gap Did Well – But There's No Safety Net When It Comes To COVID-19

Gap Inc GPS which belongs to the Zacks Retail – Apparel and Shoes industry reported Q4 and full-year results last week that beat expectations. After a downward guidance revision prior to releasing its previous (third quarter) results, Gap's fourth-quarter earnings and sales managed to top analysts' estimates as the company announced new leadership changes. Following the results, its shares initially jumped more than 5% in after-hours trading.

Earnings Report

Net sales for the quarter managed to expand 1% compared to previous year results to $4.67 billion from $4.62 billion a year ago, quite a bit better than $4.55 billion analysts were expecting. Gap managed to top consensus revenue estimates two times over the last four quarters.

But sales both online and at stores open for at least 12 months dropped 1%, but this is still not as bad as the 3.8% drop that analysts saw coming.

Quarterly earnings adjusted for non-recurring items amounted to $0.58 per share and managed to beat the Zacks Consensus Estimate of $0.41 per share, but only one year ago they were $0.72 per share.Over the last four quarters, the company has surpassed consensus EPS estimates three times.

The company recorded an impairment charge of $296 million during the quarter that was related to store assets and operating lease assets of its flagship stores. Overall, the retailer reported a quarterly net loss of $184 million which results in a loss of 49 cents per share. One year ago, Gap made a net income of $276 million, or 72 cents a share.

Coronavirus

The company explained that it is not possible to assess and quantify the impact that the coronavirus will have on its business in 2020 but at the very least, it expects a damage of atleast $100 million to its sales. The company will alsol suspend share repurchases in 2020 because of the coronavirus. The coronavirus pandemics will undoubtely damage many retailers' businesses – both in the aspect of customer demand and supply.

Nike Inc NKE, Urban Outfitters Inc URBN, Abercrombie & Fitch ANF are only a few among11 major US retailers who announced temporary store closures until the end of March. This will cause a large hit to their sales as Nike, for example, has more than 1,100 branded stores globally and nearly all of the company's growth last year came from direct to consumer sales exactly from its physical locations (Nike retail stores and outlets) along with its online store (Nike.com).

Outlook

Even if we put the COVID-19 aside, Gap has underperformed the market this year and the retail market is experiencing great difficulties. Gap did begint to see its operations getting more stable during this latest quarter and this was mostly driven by improvement in Old Navy's performance.

But this is far from any guarantee that things won't go south. It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead as they surely will as the pandemics continue to weaken the economy and cause further uncertainty. Investors should also bear in mind that the outlook for the whole troubled  industry can have a material impact on the performance of the stock. Moreover, if you add it up to the overall economy, things are not looking good. Especially if you remember Gap shares have lost about 38% since the beginning of the year versus the S&P 500's ‘only' lost 15.2%.

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