Analysts React To Gap's Earnings Miss, 20% Fall: Near-Term Visibility Diminished

Gap Inc GPS reported third-quarter results that fell short of expectations and investors weren't buying management's optimistic tone.

Gap reported quarterly earnings of 25 cents per share, which missed the analyst consensus estimate of 32 cents by 21%. Sales of $3.994 billion beat the $3.82 billion estimate.

The Analysts: Morgan Stanley analyst Kimberly Greenberger maintains an Equal-Weight rating on Gap's stock with a $25 price target.

Credit Suisse analyst Michael Binetti maintains an Underperform rating on Gap with a price target lifted from $19 to $23.

'Diminished Visibility': Gap "handily" exceeded top line and gross margin estimates in its third-quarter report but marketing-driven SG&A costs more than offset the revenue and margins upside. Specifically, Greenberger said SG&A came in at $1.45 billion versus expectations of $1.26 billion due to higher marketing investments across all brands, heightened health costs and deleverage associated with store closures.

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Greenberger said management deserves credit for its focus on gaining market share through higher marketing spending and dedication towards offering customers a safe shopping experience, but the elevated SG&A spend "diminishes near-term visibility" on margin recovery and could put into risk management's 10% 2023 EBIT margins guidance.

The near-term headwinds and unclear outlook imply Gap's stock could give back some of its 120% post-first quarter gains, the analyst wrote. This could remain the case until investors "gain confidence" that SG&A can "become a point of leverage for the business."

Growth Plans 'Come With A Cost': Gap showed investors "solid" sales and gross margins although flow-through was "unexpectedly weak" as more near-term investment in marketing impacted EPS, Binetti wrote in a note.

Gap's Analyst Day presentation in late October prompted the Street to "quickly" embrace management's path to at least $3 per share of EPS on EBIT margins approaching 10% by 2023, the analyst wrote. But Gap's report coupled with management's comments that marketing could remain elevated questions the company's ability to achieve these targets.

GPS Price Action: Shares of Gap were trading lower by nearly 20% at $21.85.