Trading Gap's Earnings Today (GPS, JCG, AEO)

Specialty retail company Gap GPS is poised to release Q4 earnings today at market close. Analysts expect $0.57 earnings per share, an increase from $0.51 one year ago; an 11% increase. Analysts also expect Gap to report $4.26 billion in revenue. With a low forward P/E of 11.57, TTM levered free cash flow of $1.13 billion, investors may want to pay extra close attention to the earnings announcement. As with most large companies, earnings results can play a huge role in short term gains or losses. To consider whether Gap's earnings will be favorable, it is crucial to examine the industry as a whole this past year or more specifically, the past few months. According to a report from February 15, 2011, Americans are indeed spending more. The economic recovery, slow as it is, is being boosted by both consumers and businesses. Consumers purchased more from retailers for six straight months as of December 31. The streak has continued through January as well to make it seven straight months. Due to the fact that retail sales are increased, it may serve the investor well to make the bet that earnings results will be positive today. However, Chris Christopher, an economist at HIS Global Insight, predicts that consumer spending will continue though the next few months before tapering off. Citing higher prices at the pump, and increased prices for food, and the staggeringly high unemployment rate that remains, Christopher does not believe the rate of spending will stay at current levels. Examining Gap's financial statement, it is clear it is in excellent shape financially; current assets are adequate to cover all total assets. However, competitors J. Crew JCG and American Eagle Outfitters AEO have current ratios that are higher than Gap. Accounting for inventory with the quick ratio, Gap loses again with .96 compared with 2.1 for American Eagle, and 1.4 for J. Crew. Utilizing a Du Pont analysis, Gap has the highest operating efficiency as measured by profit margin but is tremendously lower with its asset use efficiency as measured by asset turnover. While Gap has potential advantages in the short-term, it is unclear whether future performance will match the past year. Competitors appear to have significantly better financials, in particular the return on equity and may provide investors with a better investment. Even so, with the holiday season behind us and a hopeful but still bleak economy left in its wake, it is possible that the future earnings of Gap will fail to impress. Neither Benzinga nor its staff recommends that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.