The Gap Seeks To Stave Off Declining Mall Traffic With Digital Marketing Drive

“We see some scale opportunities that can help Gap in the coming years; however, we believe secular pressures also remain in place, particularly given QTD softness in mall traffic, which makes 2017 uncertain,” Wedbush’s Morry Brown said in a note.

The analyst maintained a Neutral rating on the company, while lowering Gap Inc's GPS price target from $27 to $23.

Opportunities & Improvements

Although Gap issued a back-half weight EPS guidance, management provided an “optimistic take” on the company’s positioning in the retail sphere, highlighting opportunities based on sale advantages.

Management believes these advantages can be leveraged to gain an edge over peers on various fronts, including real estate rates, vendor negotiations and investments.

While CEO Art Peck emphasized improvements Gap was making in speed to market and responsiveness, Brown feels “less sanguine that the likelihood that improved responsiveness can fully overcome the current mall traffic challenges retailers are facing.”

The first half of 2017 EPS guidance is below consensus, and the Q1 sales have had a difficult start. The analyst pointed out that the traffic and sales slowdown increased uncertainty.

Related Link: 10 Stocks To Watch For February 24, 2017

Marketing Focus

However, beyond February, Gap expects profitability pressure during 2017, driven by increased marketing spend, higher incentive comp and continued omnichannel investments.

“Continuing the theme from 2H16, the company expects to use additional marketing to help combat mall traffic challenges in 1H17,” the analyst noted, adding that Gap’s marketing was focused on digital, since management believes that returns are higher and easier to measure.

The EPS estimates for 2017 and 2018 have been lowered from $2.17 to $1.96 and from $2.25 to $1.94, respectively.

Image: Mike Mozart, Flickr