Gap said after the market closed on Thursday that last month's net sales across all of its brands were flat compared to sales of $1.23 billion last year.
The San Francisco-based retail company said that comparable sales declined 2% in August, compared to consensus expectations of a 1.6% gain. Its flagship brand saw a 6% decline in same-store sales compared to a 2% gain in the same month last year. Banana Republic's comps also declined 2% compared to a 2% gain last year, while its Old Navy brand reported a 2% comp gain, but was lower than the 3.4% expected.
Gap specifically noted in a press release that its August sales performance "will likely put pressure on the brand's gross margins in September 2014."
Shares were falling 4.4% to $44.52 at last check. Here's what analysts are saying on Friday about Gap.
Laura Champine, Canaccord Genuity (Buy: $50 PT)
GPS reported a 2% SSS decline on top of +2% in August, below our +2.8% estimate and consensus of +2%. Old Navy global turned in its fifth consecutive month of SSS gains, but it wasn't enough to offset weakness at Gap global. SSS declined 6% on top of +2% at the namesake brand, which has inflated inventory levels heading into the more important month of September (historically accounts for around 37% of total Q3 sales vs. August at 31%). We are now modeling for 50bps of gross margin pressure in Q3, versus our prior flat forecast, as the Gap brand clears out the excess inventory. We expect GPS's omni-channel and supply-chain initiatives will revive gross margin from F2015-F2018, driving average annual yr./yr. increases of 27bps over that span. We continue to like the long-term opportunity here, especially with shares trading at 13x our C2015 EPS estimate and 7x C2015E EV/EBITDA based on the after-hours price of $44.
Given that we are concerned Gap brand product issues may persist throughout fall/holiday, we are lowering our EPS to the lower end of management's recently-provided guidance range on their earnings call. We maintain our BUY rating for the longer-term, as we believe that the overall sector will clean up inventory throughout fall and more so in the holiday quarter that should provide margin stabilization for the Softline sector. However, we readily admit, we have concerns that the Gap design/merchandising issues may persist throughout this season, pressuring margins and any EPS upside. Nonetheless, GPS remains a well-managed, emerging global retail player that we believe has growth opportunities in the longer-term.
Richard Jaffe, Stifel (Buy; $48 PT)
Comp store sales decreased 2% in August, below our estimate and consensus of +2%. Performance was weakest at the Gap division while Old Navy continues to outperform. We anticipate that all divisions will continue to show improvement during Fall, driven by new product and marketing campaigns.
Longer term, management's investments in e-commerce globally, international stores, and new concepts should provide visibility for continued earnings growth as the rate of improvement of the core businesses slow. We are encouraged by the recent developments and the long-term prospects for Gap and reiterate our Buy rating (target price $48 or approximately 14x our 2015 EPS estimate of $3.35) as improvement in performance continues, lifting results to near historical levels of profitability.
Oliver Chen, Citigroup (Buy; $48 PT)
We acknowledge the weak August comps are lighter than we expected and we anticipate the stock should give back gains from the 2Q EPS Call. However, we believe Sept. should see improvement at Gap, in particular, driven by new Fall product, which is the first collaboration between Rebekka Bay & Michelle DeMartini, and a new brand marketing campaign. We reiterate Buy with TP of $48 based on 15x 2015 EPS and note GPS has a 2% div yield, 5% FCF yield, & repurchased 3% of mkt. cap YTD.
"We rate GAP INC (GPS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, growth in earnings per share and increase in net income. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- GPS's revenue growth has slightly outpaced the industry average of 0.5%. Since the same quarter one year prior, revenues slightly increased by 2.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The current debt-to-equity ratio, 0.47, is low and is below the industry average, implying that there has been successful management of debt levels.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Specialty Retail industry and the overall market, GAP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- GAP INC has improved earnings per share by 17.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, GAP INC increased its bottom line by earning $2.75 versus $2.32 in the prior year. This year, the market expects an improvement in earnings ($2.95 versus $2.75).
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Specialty Retail industry average. The net income increased by 9.6% when compared to the same quarter one year prior, going from $303.00 million to $332.00 million.
- You can view the full analysis from the report here: GPS Ratings Report
-- Written by Laurie Kulikowski in New York.