Gap (GPS) Down 2.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Gap (GPS). Shares have lost about 2.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Gap due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Gap's Earnings and Sales Surpass Estimates in Q3

Gap reported third-quarter fiscal 2018 results, wherein earnings and sales surpassed estimates and also improved on a year-over-year basis. This better-than-expected performance can be attributed consistent strength in Old Navy, Banana Republic and Athleta brands ahead of the crucial holiday season. However, continued weakness at the company's namesake brand and soft margins hurt results.

Notably, the company delivered positive earnings surprise in six of the last seven quarters, with sales beating estimates for the eighth consecutive quarter. Further, management lowered its earnings guidance for the fiscal year.

Q3 Highlights

In the fiscal third quarter, Gap's earnings of 69 cents per share outpaced the Zacks Consensus Estimate by a penny. The bottom line also improved nearly 19% from 58 cents registered a year ago. Quarterly earnings included currency tailwinds of 1 cent per share.

Net sales grew 6.5% to $4,089 million and exceeded the Zacks Consensus Estimate of $3,983 million. Excluding the presentation changes, the top line improved 2% year over year owing to the adoption of the new revenue recognition standard. These changes contributed $170 million to the top line. However, foreign currency translations negatively impacted revenues by $20 million.

Total comps were flat compared with 3% growth in the year-ago period. Comps for Old Navy and Banana Republic were up 4% and 2%, respectively, while the Gap brand's comps fell 7%.


Gross profit rose 6% to $1,623 million, with flat gross margin at 39.7%. Excluding the impact of presentation changes from the revenue recognition standard, gross profit declined 2% and gross margin contracted 160 bps to 38.1% mainly due to higher shipping expenses and increased promotional activity for the flagship brand.

Operating income declined nearly 4% to $363 million, with operating margin contraction of 90 bps to 9.8%. Excluding the impact of the revenue recognition standard, operating margin declined 50 bps to 9.3%.


Gap ended the quarter with cash and cash equivalents of $958 million, long-term debt of $1,249 million, and total stockholders' equity of $3,440 million.

In the first nine months of fiscal 2018, the company generated net cash flow from operations of $567 million and incurred capital expenditure of $510 million. Gap had free cash flow of $57 million as of Nov 3, 2018.

Coming to Gap's shareholder-friendly moves, the company bought back 3.6 million shares for approximately $100 million and paid dividend of 24.25 cents per share in the fiscal third quarter. This dividend reflects more than 5% growth year over year.

Additionally, management announced a dividend of 24.25 cents per share for the fiscal fourth quarter, payable on or after Jan 30, 2019, to its shareholders of record as of Jan 9.

For fiscal 2018, management now projects capital expenditure of roughly $750 million compared with $800 million anticipated earlier. The amount will be used for transformative infrastructure investments to enhance its omni-channel and digital strategies, including information technology as well as supply chain capabilities.

Moreover, management anticipates spending $100 million for share buybacks in the fiscal fourth quarter.

Store Updates

In the first nine months of fiscal 2018, Gap opened 109 company-operated stores, most of which were Old Navy and Athleta outlets. However, the company closed about 56 stores, mainly Gap and Banana Republic. Consequently, Gap ended the fiscal third quarter with 3,688 outlets in 43 countries, of which 3,218 were company-operated and 470 were franchise stores.

In fiscal 2018, Gap still anticipates opening nearly 25 company-operated stores, net of closures and repositions. In sync with its growth strategy, it expects to open more of Athleta and Old Navy stores, and close Gap and Banana Republic stores.


Driven by current-year adjustments to fiscal 2017 net provisional tax under TCJA, Gap revised its effective tax rate guidance for fiscal 2018. It now expects effective tax rate of about 25% in fiscal 2018 compared with 26% anticipated earlier.

Consequently, the company lowered its earnings per share view for fiscal 2018. Management now envisions earnings per share of $2.55-$2.60, reflecting a decline from $2.55-$2.70 expected earlier. Comps are still anticipated to be flat to up slightly.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Gap has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.


Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Gap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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