Gap Guidance Is Great Despite January Sales Missing Expectations

Wedbush’s Morry Brown prefers to remain on the sidelines for Gap Inc GPS, since there does not appear to be a catalyst on the horizon “to drive sustained momentum across the company’s portfolio of brands.”

The analyst maintains a Neutral rating on the company, while raising the price target from $26 to $27.

Better-Than-Expected Guidance

Brown mentioned, however, that Gap’s Q4 EPS guidance was better than expected, although January sales modestly missed expectations.

The company guided to Q4 EPS of $0.50–$0.51, as compared to the consensus forecast of $0.45, with the beat being partly driven by a tax benefit from a geographical mix shift and a modest improvement in the Gap division.

“Gap division’s flat 4Q comp implies an 800 bps acceleration in the three-year stack from 3Q, and demonstrates some progress for the Holiday season,” the analyst stated.

January Sales Down

The company, however, reported January same-store sales of 1 percent, below the consensus and the estimate, due to slowing two-year stack results across all its three divisions.

Brown preferred not to read too much into the January results though, “given the month's small volume and clearance focus.”

At the same time, Gap guided to Q4 same store sales of up 2 percent or flat on two-year stack from the Q3 levels.

Q1 Guidance

In addition, the Q1 adjusted EPS guidance was also above consensus at $0.50–$0.51.

The analyst explained that the guidance included “(1) restructuring costs, (2) goodwill impairment charge related to Intermix, (3) gain from insurance proceeds related to the Fishkill fire, and (4) favorable income tax impact.”

The EPS estimates for 2016, 2017 and 2018 have been raised to reflect the tax benefit.

In Tuesday's pre-market session, shares were up 1.22 percent at $22.98. Year-to-date, the SPDR S&P Retail (ETF) XRT is down 3.4 percent.