Year to date, shares of Gap (GPS) are up 5%, and had a 41% run in the last six months.
Last week, Gap reported third-quarter earnings of 60 cents per share, in line with the consensus estimate and the company's Aug. 8 preannouncement. Revenue fell 1.5% to $3.8 billion.
Third-quarter same-store sales were down 3%, which includes a 2 percentage point negative impact from the fire at the Fishkill distribution center on Aug. 29. The 1.3 million square foot building distributes products primarily to stores in the Northeast region of the U.S. for Gap, Gap Factory, Banana Republic and Banana Republic Factory. In addition, this facility was one of the distribution facilities that fulfilled online orders in the Northeast region for Gap and Old Navy. Management estimates that 12 million units may have been destroyed.
Gap Global comps were down 8%, which includes a negative 4 point impact from the fire. Banana Republic Global comps were down 8%, which includes a negative 2 point impact from the Fishkill fire. And Old Navy Global reported a 3% comp, including a negative 1 point impact from the fire.
On the conference call, management reaffirmed fiscal 2017 guidance. Management foresees earnings of $1.87 to $1.92 per share and expects to close 65 company owned stores. The company is looking for a year-end operating margin of 8.5%.
While the company didn't spell out the fourth quarter, year-end guidance implies the fourth quarter will be especially weak. At the mid-point of the company's guidance, management implied earnings of about 38 cents per share, vs. the previous consensus estimate of 50 cents.
Fiscal 2017 sales are projected to decline about 3% and earnings are expected to drop about 17%. Next year, analysts are looking for earnings of $2.12, which includes a $1 billion share repurchase program.
Retailers like the Gap historically trade in the mid teens, or 14 to 16 times forward estimates, but in this environment, most retailers are selling for much less.
With flat revenue estimates for next year and lower earnings, I can't see paying more than 10 to 12 times forward estimates for Gap (or $21 to $25). At the current quote, the stock is basically within that range, so I would avoid Gap until the company can return to top- and bottom-line growth.