Shares of Gap, Inc. (GPS) tumbled in morning trading after the company reported the fifth consecutive month of sales declines. The retailer also estimated first quarter earnings per share below analysts' expectations.
WHAT'S NEW: After the market close yesterday, Gap said April same-store sales fell 7% year-over-year on total April net sales of $1.12B, down from $1.21B for the same period last year. For the month, Old Navy SSS dropped 10% year-over-year, Banana Republic Global SSS fell 7% and Gap Global SSS were down 4% y/y. The company said it expects Q1 EPS to be in the range of 31c-32c, well below analysts' consensus estimates of 44c. In addition, Gap reported total revenue for Q1 of $3.44B, also lower than analysts' expectations of $3.54B. The retailer noted that gross margins were pressured as entering April with more inventory than planned as a result of weaker than expected traffic, which began in late March and continued into April.
STREAMLINING STEPS: In a statement, Gap announced it will take steps to "better position the company" for improved performance in order to build for the future. The company said it is searching for opportunities to streamline its operating model to be "more efficient and flexible" while also "fully exploiting" its scale advantage. In addition, Gap said it is evaluating its Banana Republic and Old Navy fleets, primarily outside of North America, in an effort to bolster its focus on geographies with the "greatest potential." CEO Art Peck commented, "Our industry is evolving and we must transform at a faster pace."
WHAT'S NOTABLE: Gap has reported a year-over-year decline in comparable sales in each month of 2016, with the largest drop so far occurring in January when the company reported an 8% year-over-year decline for the month. The year-over-year decline in same-store sales each month in 2016 continues a trend also seen in 2015, which ultimately led the company last June to announce a series of strategic actions, including the closures of roughly 175 stores in North America.
STREET RESEARCH: Topeka analyst Dorothy Lakner downgraded Gap to Hold from Buy this morning and slashed her price target on the shares to $22 from $40, citing the "dismal sales results" at the company's three brands in April. The analyst said that the retailer's outlook for Q1 is "much worse" than she envisioned and that the sluggish apparel retail environment has made it harder to execute a turnaround than in the past. Piper Jaffray analyst Neely Tamminga also weighed in on the stock, lowering her price target for gap shares to $21 from $25 and maintaining an Underweight rating. Tamminga said she would rather "wait-and-see" for better trends in sell-throughs and promotional activity before considering any rating change. Deutsche Bank analyst Paul Trussell reiterated a Sell rating on Gap and lowered his price target to $21 from $25, saying that the company has specific concerns beyond macro conditions, including an unfavorable pricing position, product fit and fashion challenges, being over-stored and limited expense savings. In addition, Stifel analyst Richard Jaffe kept a Buy rating on the stock and lowered his price target to $28 from $35, blaming the SSS decline in part to poor customer response to a "lackluster" spring merchandise assortment. The analyst said he anticipates management will undertake a variety of initiatives and progressive changes that will better position the company for the modern retail environment.
PRICE ACTION: In morning trading, Gap plunged 12.61% to $19.06.
OTHERS TO WATCH: Gap peers that are also declining this morning include Urban Outfitters (URBN), American Eagle Outfitters (AEO) and Abercrombie & Fitch (ANF).
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