Cost Cuts By Gap Management 'Getting Harder To Come By'

Gap Inc GPS reported its Q3 EPS in line with its pre-release, with better-than-expected gross margins. Cost reductions are getting tougher to achieve, and the company made a slow start to November, UBS's Michael Binetti said in a report. He maintains a Sell rating on the company, while raising the price target from $16 to $23.

Gap reported its quarterly EPS at $0.60. The company’s SSS (same-store sales) declined by 3 percent, gross margin expansion was significantly, at 200bps year-over-year, versus the Street estimate of 50bps. SG&A declined by 170bps, significantly more than expected.

Analyst Binetti lowered the EPS estimate for Q4 from $0.45 to $0.43.

Slow Start To November

Like most retailers, Gap also indicated a slow start to its SSS in November. The company noted that traffic had declined from the Q3 levels. Binetti commented, “Election distractions and a lack of early cold weather have likely been headwinds that could easily dissipate for the group.”

Cost Reductions

Gap’s indication of a sequential contraction in merch margin upside in Q4 was worrying. Cost pressure seems to be rising in Q4, and Gap is increasing its marketing expense. “All underpin our concerns that incremental cost cuts are getting harder to come by after yrs of solid cost control,” the analyst mentioned.

The upward revision of the price target reflects its rolling forward to be based on FY 2018 estimates.

At last check, Gap shares were down 9.15 percent at $27.90.