Gap Falls As Sales Slump Continues, Prompts More Store Closures
Shares of Gap (GPS) plunged on Friday morning after the retailer reported its seventh straight quarter of declining sales and said it would close more stores than previously forecast.
SOFT SALES: After the market close on Thursday, Gap reported third quarter adjusted EPS of 60c, matching analysts' estimates, but its sales declined 2% to $3.8B. Analysts were expecting quarterly sales of $3.74B. The company noted that the translation of foreign currencies into U.S. dollars positively impacted the company's reported net sales by about $17M in the quarter. Gap said same-store sales fell 3% in the quarter, with Gap Global SSS down 8%, Banana Republic Global SSS down 8% and SSS at Old Navy, a consistent bright spot for Gap, up 3%. Results in the quarter were affected by a fire in August at the company's distribution in Fishkill, NY, and noted that its adjusted EPS excluded a 9c impact from restructuring costs related to store closures and streamlining measures. Looking ahead, Gap backed its fiscal year 2016 adjusted EPS view of $1.87-$1.92, below analysts' estimates of $2.02, and its operating margin view of about 8.5%. Gap said it now expects net closures of about 65 company-operated stores in FY16, up from the 50 it previously projected, and sees a 3% reduction of square footage as compared to last year. In October, Gap said it would shut all its eight Banana Republic stores in the U.K. TRAFFIC LIKELY TO STAY CHALLENGING: Outgoing Chief Financial Officer Sabrina Simmons commented on the retailer's earnings call that "We understand the fact that traffic is likely to continue to be challenging as we look forward," also noting that industry traffic has decelerated November month-to-date. Simmons added that Gap is investing "meaningfully" in marketing across its portfolio brands during the holiday season. Chief Executive Officer Art Peck said he is "very bullish" about the long-term opportunity in China.
WHAT'S NOTABLE: Mall-based retailers, including Gap, have been hurt by the increasing popularity of fast-fashion retailers like Zara, Forever 21 and H&M, as well as an increase in online shopping. Earlier this year, Gap said it would take steps to better position the company for improved business performance and that it was identifying opportunities to streamline its operating model to be "more efficient and flexible." Last week, Gap said Chief Financial officer Sabrina Simmons would leave the company at the end of the year.
ANALYST COMMENTARY: Following Gap's report, analyst commentary was mixed. Citi analyst Paul Lejuez downgraded Gap to Sell from Neutral on expectations the company's brands will continue to struggle. Lejeuz noted that the company's fourth quarter is off to a weak start, and the prospect of lower taxes under a Trump administration is unlikely to help the company as much as other retailers. Meanwhile, Jefferies analyst Randal Konic raised its price target to $36 from $32 and said the retailer's results point to a bottoming in fundamentals and expects Gap's "gradual improvement" will continue.
PRICE ACTION: Gap fell over 11% to $27.21 in morning trading.
OTHERS TO WATCH: Other apparel and mall-based retailers trading lower this morning include Abercrombie & Fitch (ANF), which reported lower than expected EPS and sales for its third quarter, American Eagle (AEO), Nordstrom (JWN) and Urban Outfitters (URBN).
Disclosure: None.