Gap's Growing Pains: Analyst Eyes Fiscal Woes Despite Savvy Cost Management

Telsey Advisory Group analyst Dana Telsey reiterated a Market Perform rating on the shares of Gap, Inc. GPS, with a Price Target of $13.
Gap is scheduled to report its first quarter (ended April) earnings results after the market close on Thursday, May 25.
The analyst notes that Gap is working to fix issues across the brand's assortment; however, the product misses are expected to weigh on its unit Athleta's growth in the near term. At Athleta, sales fell 0.7% Y/Y in the fourth quarter.
The analyst sees the sale of Gap China to Baozun, which was completed at the beginning of last year, will account for a 200-bps headwind in Q1, as noted by the management.
Additionally, FX is expected to weigh on Q1 by ~100 bps.
The analyst sees Gap's 1Q23 EPS of loss $0.11 vs. $0.44 loss last year, with total sales decreasing 5.1% Y/Y to $3.30 billion.
On the bullish side, Dana applauds Gap's cost management techniques. The company is renegotiating its advertising agency contracts, which will generate $75 million in estimated savings this year.
Gap is also reducing its spending across technology, operating costs, and rationalized investments, which is expected to generate $50 million in estimated savings.
Considering these, Dana sees 70 bps of gross margin expansion to 35.2% in Q1, with 450 bps of operating margin expansion Y/Y to 1.2% loss.
Price Action: GPS shares are trading higher by 2.19% to $7.95 on the last check Monday.