Why Is The Gap (GPS) Down 2% Since Its Last Earnings Report?

It has been about a month since the last earnings report for The Gap, Inc. GPS. Shares have lost about 2% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is GPS due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Gap Beats on Q4 Earnings & Sales, Guides FY18

Gap reported better-than-expected fourth-quarter results. This marked the company’s fourth straight quarter of positive earnings surprise while recording the fifth consecutive sales beat. Further, the company provided an encouraging view for fiscal 2018.

Q4 Highlights

Gap’s adjusted earnings of 61 cents per share in the fiscal fourth quarter surpassed the Zacks Consensus Estimate of 59 cents. Moreover, the bottom line improved 19.6% from 51 cents earned in the year-ago period. Currency dented earnings per share growth by about 2 cents per share. On a GAAP basis, earnings came in at 52 cents compared with 55 cents in the prior-year period.

Net sales grew 7.9% to $4,778 million and also fared better than the Zacks Consensus Estimate of $4,677 million. The upside was backed by comparable store sales (comps) growth of 5% versus 2% increase in the year-ago period.

Comps continued to gain from robust Old Navy performance that was fueled by strength in category and improved traffic. Moreover, the company’s namesake brand reported flat comps while Banana Republic comped positively, driven by momentum witnessed during the holiday season. Comps numbers for Old Navy and Banana Republic grew 9% and 1%, respectively, while the Gap brand reported flat comps.

Margins

Excluding 2016 restructuring costs, gross profit rose 17.8% to $1,759 million with the gross margin expanding 310 basis points (bps) to 36.8%. The increase was driven by rent and occupancy leverage of 130 bps backed by sales growth and 180 bps expansion of merchandise margins.

Operating income rose 24.9% to $396 million with operating margin expanding 110 bps to 8.3%.

Financials

Gap ended fiscal 2017 with cash and cash equivalents of $1,783 million, long-term debt of $1,249 million and total stockholders’ equity of $3,144 million.

In fiscal 2017, the company generated cash flow from operations of $1,380 million and incurred capital expenditures of $731 million. Gap had free cash flow of $715 million as of Feb 3, 2018.

For fiscal 2018, management projects capital expenditure of roughly $800 million, which will be slated for transformative infrastructure investments to support its omni-channel and digital strategies such as, information technology and supply chain.

Coming to Gap’s shareholder-friendly moves, the company paid a dividend of 23 cents per share in the reported quarter and bought back 0.5 million shares for approximately $15 million. Additionally, the company approved an annual dividend increase of more than 5% to 97 cents for fiscal 2018. Consequently, it announced a first-quarter dividend of 24.25 cents per share, which is payable on or after May 2 to shareholders with record as of Apr 11.

Going forward, management plans to make buybacks worth roughly $100 million every quarter.

Store Updates

In the fourth quarter, Gap introduced 56 stores while it shuttered 101 outlets. Of these 56 stores, 53 were company-operated and three were franchises. Similarly, the stores that were closed included 81 company-operated and 20 franchise locations. In fiscal 2017, the company closed net 35 company-operated stores. Consequently, the company ended fiscal 2017 with 3,594 outlets in 45 countries of which 3,165 were company-operated and 429 were franchises.

In fiscal 2018, Gap anticipates opening nearly 25 company-operated stores, net of closures and repositions. In sync with its strategy, the company expects to open more of Athleta and Old Navy stores, while it plans to close down Gap and Banana Republic stores.

Outlook

Gap provided a robust outlook for fiscal 2018, which reflects an increased confidence in its balanced growth strategy and a momentous growth in earnings capacity of the company. Going forward, the company expects significant earnings growth driven by the recent tax reform.

Gap envisions adjusted earnings for fiscal 2018 in the range of $2.55-$2.70 per share. Further, comps are anticipated to be flat to up slightly. The company’s earnings guidance reflects about 7 cents positive impact from currency fluctuations. Moreover, the effective tax rate for fiscal 2018 is expected to be nearly 26%, backed by the impacts of the recent tax reform.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter. .

The Gap, Inc. Price and Consensus

 

The Gap, Inc. Price and Consensus | The Gap, Inc. Quote

VGM Scores

At this time, GPS has a great Growth Score of A and a grade with the same score on the momentum front. The stock was also allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise GPS has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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