The Gap Investors Get Spooked By Weak Q4 Guidance

Gap Inc GPS reported in-line Q3 EPS, but announced a more cautious than expected outlook for Q4.

Although the company delivered a significant gross margin beat in Q3, its guidance reflects margin contraction in Q4, which “spooked investors,” Baird’s Mark Altschwager said in a report. He maintained a Neutral rating on the company, with a price target of $28.

“Bottom line, we are encouraged by regained momentum at Old Navy in Q3 and some underlying improvement in Gap’s women’s business,” Altschwager mentioned. He added, however, that Gap’s shares rallied recently, gaining 34 percent since September 30, and “appear to reflect a more optimistic outlook.”

Q3 Results

Gap reported its adjusted EPS at $0.60, in-line with its prerelease and the consensus estimate. Comps at Old Navy rose by a healthy 3 percent, partially offsetting the 8 percent declines at both Gap and Banana Republic.

The company recorded 160bps [basis points] of margin expansion, significantly higher than the consensus estimate of 80bps. Merchandise margin expansion also came in higher than expected, backed by tight inventory levels, but was offset by higher-than-expected operating expenses.

Q4 Guidance

Management maintained its full-year outlook, implying a Q4 performance that is well below Street estimates. Management indicated that the company’s performance would be impacted by slower traffic in November to date and higher SG&A “as the company laps executive compensation reversals and ramps advertising,” among other reasons, Altschwager noted.