Gap Shares Drop Despite Q2 Beat; The Sell-Side Weighs In

Gap Inc GPS shares are reeling despite the apparel retailer's second-quarter earnings and sales beat Thursday. 

Wall Street Weighs In

Nomura analyst Simeon Siegel maintained a Neutral rating on Gap with a $32 price target.

Credit Suisse analyst Michael Binetti maintained a Neutral rating with a $33 price target.

Baird analyst Mark Altschwager maintained a Neutral rating with a $35 price target.

Morgan Stanley analyst Kimberly Greenberger maintained an Underweight rating with a $25 price target.

The Thesis

With wins at the low end and aspiration end of the spectrum, and struggles persisting at the middle end with the Gap brand, the company serves as a microcosm of retail, said Nomura’s Siegel.

“Old Navy continued its path of consistency and [Banana Republic] is a positive, but Gap brand continues to lag and is sitting on a second quarter of excess product," he said. "And although it was not stated explicitly, we wonder about a likely deceleration at Athleta, with [management] calling out swim weakness and other revenue growth dropping meaningfully." 

Credit Suisse's Binetti said that, despite the earnings beat, Q2 same-store sales components were worrisome, with further deceleration at Gap and a lack of upside at Old Navy to protect the company's second-half earnings outlook.

Gap continues to prioritize margins over sales — which helped stabilize profitability — and the company has been aggressive at managing inventory, Binetti said. Inventory imbalances and a new brand CEO have increased the risk of negative revisions to 2018 guidance, he said. 

“We see little reason for multiple expansion until GPS can take some pressure off Old Navy to consistently deliver on corporate EPS targets." 

Morgan Stanley's Greenberger said that Gap’s Q2 beat looks fine in isolation, but due to how the overall sector performed in the quarter, the "margin profile looks underwhelming."

The analyst said she remains skeptical and questions whether significant operating margin expansion will materialize.

Baird's Altschwager said he wants to love Gap, with macro tailwinds in the company’s favor and numerous company-specific drivers supporting a path to margin improvement.

“However, the Q2 update left too many-term questions unanswered; thus, risk-reward appears balanced." 

Price Action

Gap shares were falling nearly 9 percent to $29.58 at the time of publication Friday afternoon. 

Related Links:

Victoria's Secret Is Dragging On L Brands, Analysts Say After Q2 Print

Urban Outfitters' Record Q2: The Sell-Side's Take

Public domain photo via Wikimedia.