Gap's Q4 Could Prove More Challenging As Consumer Behavior Changes Post Holidays, Analyst Says

Telsey Advisory Group analyst Dana Telsey reiterated a Market Perform rating on the shares of Gap Inc GPS with a price target of $15.
The clothing and accessories retailer. Will report its fourth-quarter earnings after the market close on Thursday, March 9.
The analyst is looking for 4Q22 EPS of ($0.52) versus ($0.02) last year, and the consensus of ($0.47).
On the topline, the analyst is looking for total sales to decline 5.3% YoY to $4.29 billion, slightly below the consensus estimate of down 3.7% YoY $4.36 billion.
Last quarter, management noted fourth quarter sales could be down mid-single digits, due in part to the timing of licenses and an Old Navy holiday event that occurred in Q3, as well as cautious planning for a challenging and promotional holiday season said the analyst.
Gross margin is expected to benefit by approximately 540 basis points YoY, as the company laps about $245 million of incremental air freight costs from the fourth quarter of FY21, the analyst remarked.
However, air freight leverage is planned to be offset by roughly 200 bps of ongoing inflationary and commodity cost pressures, added the analyst.
Management outlined several strategic priorities to strengthen the business model in the near term as the company navigates the current macro environment, added the analyst.
GPS continued to reduce its operating expense base, resulting in approximately $250 million in estimated annualized savings by eliminating 500 existing and open roles across corporate and pausing hiring and contractor spend for the rest of 2022, renegotiating advertising agency contracts, and reducing spend across technology, operating costs, and rationalized investments said the analyst.
However, Q4 was not expected to benefit from these actions as a result of timing and severance, in addition to higher seasonal labor costs compared to a year ago, the analyst added.
Following Gap's better-than-expected Q3 and sequential improvements across all brands, the analyst believes Q4 could prove more challenging as many retailers saw consumers gravitating to value and clearance before and after the holidays, the analyst said.
Price Action: GPS shares are trading lower by 0.27% at $12.73 on the last check Monday.

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