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The Gap Offers Many Lessons on Retail Sector Sentiment

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The Gap (GPS) is falling fast on Friday after a first quarter report that missed the mark badly.

Shares of the San Francisco-based apparel retailer are set for their lowest open in about three years, marking a nearly 15% drop in pre-market hours after missing the report's release post-market on Thursday. The pre-market move has left the stock firmly in the losers camp as the overall retail sector becomes increasingly bifurcated.

The print for the three months ending on May 4, the company's fiscal first quarter, came in at 24 cents per share, well shy of the Street consensus forecast of 32 cents while revenues fell 2% year over year and same-store sales slumped 4%, the steepest in three years.

"Obviously we're disappointed in our Q1 results," Arthur Peck told analysts on Thursday evening. "Not unlike others in the industry, our results highlight some of the macro challenges we all faced."

He said that a confluence of weather trends, holiday shifts, and tax changes as significant factors impacting performance that remained out of control of management.

"While traffic and sales trends improved as we moved through March and April, it was difficult to overcome the extremely slow business that we and others encountered in February," Peck commented. "We also missed opportunities on our own, and we could have executed, as always, better across places in our brands."

Peck worked to encourage optimism on the call, noting the company's efforts to deliver better results for the second half of the year as many macro trends potentially roll off.

"We recognize that the needs of our customers are changing, and we're not waiting around hoping that we muddle through. We're running towards what we see as an exciting next step in our evolution," he said.

Still, Wall Street remains largely unconvinced.

"We remain on the on the sidelines for now, optimistically awaiting greater visibility, as evidenced in data across email receipts, credit card data, and mall traffic, culminating in a signal showing a spark in consumer spending," Wedbush analyst Jen Redding wrote in a note to clients on Friday. "Shares of GPS currently trade at a 38% discount to the company's historical P/E multiple, which we see as fair for a shares of a retailer led by a management team who have been trying to turn the namesake brand around for the last 4 years with limited success thus far."

To hear more analysis on the company's plan to spin-off Old Navy, its sensitivity to tariffs, and how both its results and its peer PVH Corp.'s (PVH) plummet can coach retail sector investors in 2019, head over to Real Money for all-day coverage on the Stock of the Day.

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