Wall Street analysts seem to have detached from reality when it comes to beleaguered retailer Gap (GPS) .
Gap reported Monday evening that its same-store sales in October fell 1%, the tenth month of slower sales out of the last 11. Wall Street was banking on a 2% decline. The better-than-expected sales number for Gap -- driven mostly by a 3% same-store increase at the value-oriented Old Navy chain -- masked continued disturbing declines at the Gap and Banana Republic divisions.
Gap brand sales have declined for an alarming 10 straight months, and Banana Republic sales have fallen for a dizzying 20 straight months, according to the company.
Same-store sales at Banana Republic fell 4% in October. At Gap, same-store sales cratered 7%. Gap said third-quarter earnings will be in a range of 59 cents a share to 60 cents a share. Wall Street was banking on 53 cents a share.
Analysts tripped over themselves to heap praise on Gap execs for starting to drive improving sales results and profit margins.
"We are encouraged by October sales that beat expectations and management commentary that underscored momentum at Old Navy, as well as signs of stabilization at Gap," gushed Jefferies analyst Randy Konik in a note. Konik reiterated his buy rating on Gap's stock.
The upbeat tone on Gap was shared elsewhere.
"While the Gap banner remains a work in progress, we are encouraged as Old Navy's turnaround continues to gain momentum from which same-store have been flat or positive for five consecutive months," crowed Keybanc analyst Ed Yruma, who added that Gap's shares are "compelling" headed into the holiday season. Yruma reiterated his overweight rating on Gap, the equivalent of a buy rating.
What are the numbers crunchers seeing in Gap?
Aside from a brutal stretch of sales due to the shift to online shopping and competition from fast-fashion houses such as H&M (HNNMY) , Gap recently announced that its CFO Sabrina Simmons would depart in January, the end of the retailer's fiscal year. Simmons has held the top finance post since 2007, and has been with Gap dating back to 2001, when apparel design wizard and current J. Crew CEO Mickey Drexler was Gap's chief. Gap's founder, Donald Fisher, was chairman.
Gap CEO Art Peck may be looking for a new chief financial officer from outside the company. A new CFO could come in and seek out deeper cost savings than what Wall Street has been expecting. And that would likely entail overseeing a bigger -- and possibly messier -- store-closing campaign than Peck and Simmons have crafted.
In June 2015, the company detailed plans to close 175 Gap stores in North America over the next few years. At the time, Gap estimated the annual savings would be about $25 million, beginning in 2016. Then this May, Gap said it would close its fleet of 53 Old Navy stores in Japan and close more Banana Republic locations, mostly overseas. It also promised to "streamline its operating model" to further cut costs.
Gap said the new measures would save it about $275 million in annual costs starting next year. Even so, Gap remains a sprawling global enterprise that likely needs to be further corralled to survive the shifts in retail. At the end of the second quarter, Gap boasted a dizzying 3,730 store locations in 52 countries. Total square feet operated by Gap stood at a colossal 37.8 million.
Fortunately for investors, there are several level-headed analysts on Wall Street when it comes to Gap.
"Although [sales] trends are clearly a positive step and we have believed the setup would take shares higher in the near term, we see long-term pressures persisting, and remain at a neutral rating as we continue to wonder if the business is still too large within the new norm of retail," wrote Nomura analyst Simeon Siegel.
Others are more blunt than Siegel on Gap's long-term prospects.
"We think Gap's valuation proposition is no longer competitive, and two of its major brands (Gap and Banana Republic) have lost relevance with consumers. These are not easily fixable near-term, leaving us confident Gap will continue to cede share like the department stores and teen retailers," wrote Morgan Stanley analyst Kimberly Greenberger in a recent note to clients.
Even Mr. Market suggests it may be wiser to listen to the Gap bears. Gap's stock popped as much as 5% in after-hours trading on Monday after sales were released, but dipped about 4% in premarket trading on Tuesday before rebounding flat.