Old Navy Comp Decline A Worry For Gap

Gap Inc GPS shares are falling after reporting a second-quarter sales miss. Gap CEO Art Peck said the company was facing a difficult competitive environment after all three divisions of the company delivered negative comps.

Fixable, But Waiting For Signs

Morgan Stanley analyst Kimberly Greenberger says Old Navy’s merchandise issues are fixable, but long lead times mean that investors will need to wait for signs of improvement.

Old Navy has been a key driver for the company for years, but saw its fourth consecutive quarter of sequential comp deceleration and only its fourth negative quarterly comp in five years.

“We recognize that this comp result was likely an unavoidable outcome for Old Navy due to merchandise decision missteps in 4Q’18 that bled into 1H given 12-month design lead times. This is not unusual, as the business has historically shown some degree of volatility, largely driven by variable fashion execution,” Greenberger wrote in a note.

The analyst maintained an Underweight rating on the stock and lowered her price target from $16 to $15.

Concerns Remain

Wells Fargo analyst Ike Boruchow is a bit surprised at the magnitude of the comp decline at the all-important Old Navy business.

The analyst says the commentary regarding now-struggling Old Navy feels similar to the years-long narrative of Gap struggles, and remains concerned about the company getting back on track before the holidays.

“Notably, in spite of a lackluster 2Q, the company reiterated their FY outlook- but in order to achieve this, they are clearly looking for a meaningful acceleration in 4Q, based on second half gross margin commentary as well as hope for comp inflection this holiday,” Boruchow wrote in a note.

Management is counting on Gap and Old Navy to improve meaningfully, which he the analyst says seems highly risky given its recent track-record.

“At the end of the day, these 2Q results did not alter the GPS story, and we would remain sidelined until GGPS can gain some visibility into their trajectory,” he said.

Boruchow maintained a Market Perform rating with a $18 price target.

Gap shares traded down 4.2% to $17 at time of publication.

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