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Q1 Preview: Investors May Crawl Out of The Gap (GPS) Following Results; Margin Pressures Loom

With retailers like Limited ( LTD ) and Wiliams-Sonoma ( WSM ) recently reporting stronger than expected earnings, but issuing lighter guidance, one might wonder if the same is in store for The Gap ( GPS ).

The Gap is expected to report EPS of $0.39 on revs of $3.26 billion. The numbers represent an expected 9.3 percent drop in earnings and 2.1 percent reduction in turnover compared with Q110. In its fourth-quarter, Gap had EPS of $0.60 and revs of $4.36 billion, both beating the Street consensus.

Gap's stock gained 19.7 percent through the quarter, to $23.24 at the end of April. Shares are just about flat since then.

Analysts appear to be a bit more even-keeled on Gap; nine analysts have a Buy rating on the shares, 20 maintain a Hold, and two recommend to Sell. The price target average on the Street is $23 for Gap, with a high of $28 and low of $19. Gap has traded in a range of $16.62 to $23.73 over the last 52-weeks, with the high coming in early May of this year, and the low last August.

Analyst Commentary

Though not maybe segmented solely to this quarter, JPMorgan is looking at Gap's efforts to shrink its brick and mortar footprint and focus more on its eCommerce business. JPM notes that Gap will reduce overall square footage by 10 percent in 2011, which brought ROIC up to 36 percent in 2010 from 17 percent in 2005. JPM also notes that with $1 billion in buybacks anally, on average, Gap's entire free float could be retired by 2017. Finally, JPM notes that Gap may be be treated equally with peers, and, given potential for global expansion, thinks that it trades at a 40 - 50 percent discount across most valuation metrics.

Wedbush thinks that this quarter will be relatively in-line for Gap. Wedbush notes the recent shift in the EVP of the Gap Global Design for Adult & Body position, and depature of President Marka Hansen as negative impacts on its merchandise mix. Gross margin should drop about 2.1 points to 40 percent.

Deutsche Bank is also looking for margin compression as cost stream begin to rise and SG&A is rising each quarter. Deutsche notes that "inventory growth versus sales growth gap for the company remained high at ten percentage points," meaning that management commentary to address inventory unit positioning will be a key point for investors.

Analyst Estimates

  • JPMorgan - EPS of $0.40

  • Wedbush - EPS of $0.39

  • Deutsche Bank - EPS of 0.39

Gap shares have just popped into positive territory this afternoon, and are now0.4 higher. The Company is expected to report earnings after the close today.

Stay tuned to's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release.

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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