Gap CEO Says Retailer Not 'Dead, Dying Or Sick' As Sales Top Expectations
Shares of Gap (GPS) are in focus this morning after the retailer reported fourth quarter sales that beat expectations. Gap's report comes just weeks after the company reported increased sales in January, led by solid gains at Old Navy and the namesake Gap brand, offset by continued struggles at its Banana Republic unit.
EARNINGS NEWS AND 2017 GUIDANCE: Gap reported Q4 adjusted earnings per share of 51c, in line with analysts' estimates, and its quarterly revenue of $4.43B beat analysts' consensus estimate of $4.39B. Gap previously forecast quarterly adjusted EPS of 50c-51c. Same-store sales for the quarter were up 2%, with Old Navy reporting a 1% same-store sales increase and Gap and Banana Republic reporting comp declines of 3% and 7%, respectively. Looking ahead, Gap forecast fiscal 2017 EPS of $1.95-$2.05, including the estimated negative impact of approximately 9c due to foreign currency fluctuations at current exchange rates. Same-store sales for the fiscal year are anticipated to be flat or up slightly and net sales are expected to be "slightly below this range" due to an expected negative impact from foreign currency fluctuations year-over-year. Additionally, Gap noted that EPS for the first half of the year are expected to be down high single digits vs. last year.
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." In November, Gap CEO Art Peck said he was "feeling very good" about the product in the company's stores across all of the brands. CFO Sabrina Simmons commented at the time that Gap was "investing meaningfully" in marketing across its portfolio brands during the holiday season. Simmons said, "We are not necessarily expecting an immediate payback from these investments but consider them to be important for the longer term health of the business." Simmons also commented that Gap expected the negative impact from the fire at its Fishkill distribution center to be just over one comp point in Q4.
GAP NOT 'DEAD, DYING OR SICK': On a conference call with analysts, CEO Peck said yesterday that "If you read the headlines today, you'll see the words dead, dying, sick. We are none of those." Peck added that "We are healthy and strong and have a plan and clear direction." Peck also said the company is in a position to benefit from competitors who have gone out of business, saying "When the lights go off and the windows get boarded over, that is market share that is made available to the rest of the industry. She's not stopping shopping. She's shopping someplace else." During the year, Peck said Gap plans to add 40 net new stores, focusing on Old Navy and Athleta, and said closures will be weighted toward the Gap brand.
ANALYST COMMENTARY: Wedbush analyst Morry Brown, who has a Neutral rating on the stock, noted that Gap offered an "optimistic" take on its position in the retail market, but believes secular pressures remain in place given quarter to date softness in mall traffic, leading to an "uncertain" 2017. Brown is more confident in Old Navy's ability to build on its momentum from Q4 over Gap and Banana Republic, adding that cost cuts "help set a floor under EPS, but largely serve to offset the impact of traffic and margin declines at Gap and Banana Republic." Jefferies analyst Randal Konik said he is "encouraged" sales growth is more recently broad-based and sees "significant opportunity" with Gap in "deep value territory." Konik noted that Old Navy is "well-positioned" given its exposure to fast fashion and says Gap remains "relevant." Baird said it is "encouraged" by Gap's gross margin trends, though higher investments will continue to pressure the company's results in the first half of the year. Baird notes that Gap management is "taking the right steps" to support long-term growth. SunTrust analyst Pamela Quintiliano said she'll "remain on the sidelines" as Gap's initiatives will take time to implement.
PRICE ACTION: Gap is down about 0.3% in pre-market trading.
OTHERS TO WATCH: Other mall-based apparel retailers include Nordstrom (JWN), J.C. Penney (JCP), American Eagle Outfitters (AEO), Abercrombie & Fitch (ANF) and Urban Outfitters (URBN).
Disclosure: None.