Deutsche Bank Comments On Gap Earnings Results

The Gap's GPS 3Q's most interesting takeaway was the degree to which Gap Inc. is now benefitting from share repurchases. For the first time since at least '07, quarterly EPS grew by double digits entirely from buy-backs. From here, our concern is that Gap product won't sell at full price in an inflationary envt., so discounting will pressure margin. EBIT margin down y/y for the first time in 10+ Qtrs., and it expects so for at least the next two. Deutsche Bank maintains a Sell as FY11 consensus too high, with $17 PT based on 10x FY11 EPS. A risk includes over-reliance on buy-backs to drive EPS growth, which likely becomes even more heightened as EBIT margins are now declining y/y, for the first time since at least 1Q08. While occupancy or SG&A cuts may help, our larger concern is that the biggest historic driver by far, merchandise margin, began to deteriorate in 3Q. Deutsche Bank has a Sell rating on GPS GPS is trading lower at $20.10