Gap (GPS) is the latest retailer to provide it's Q1 earnings report. GPS will report after the close with a conference call to follow at 5pm ET.

Current Capital IQ Consensus stands at EPS of $0.32 on Revenue of $3.78bln.

Guidance

  • FY20 EPS is expected to be in the range of %2.40-2.55.

It has been a rough earnings season for specialty retailers. Concerns over the business model and an overabundance of consumer options has long been a weight on an industry viewed as over extended. Brick and mortar build outs have weighed heavily on balance sheet and margins allowing quicker e-commerce giants cut into market share and, more importantly, hold and expand. This has pressured margins and free cash flow to fund the prior build outs. It has also led to a change in the way younger consumers shop. Adding to the pressure is concerns around the trade war as China has morphed into a significant supplier of cheap labor which has allowed retailers to keep costs lower. 

GPS has certainly been caught up in this wave. One of the more interesting aspects for Gap though came last quarter when it announced that it would roll out its Old Navy brand into a standalone entity. ON was the company's best performing brand and investors have been clamoring for the company to make this move. However, it leads to the question as to what is left when you take ON and its revenue (approx 1/2 of GPS sales) and income (approx three quarters of income). Many are putting their hopes in the company's new Athleta brand which has been growing in significance. Commentary around the spin off, cost savings on store closures and growth in Athleta will be key for the stock price.

Shares of GPS are down approx 20% since mid-May. This has the stock trading at 3-year lows. A failure to impress could bring the 7-year low of $17 hit back in May of 2016 into focus.

2018 Comps

Old Navy Global +3% despite lapping a tough +6% comp in 2017. Compare that to Gap Global: -5% vs a -1% comp in 2017. Banana Republic Global has done a bit better than Gap: +1% comps after lapping -2% comps in 2017.

Q4 Recap

  • GPS reported Q4 (Jan) earnings of $0.72 per share, $0.03 better than the S&P Capital IQ Consensus of $0.69; revenues fell 3.2% year/year to $4.62 bln vs the $4.69 bln S&P Capital IQ Consensus. the company's fourth quarter comparable sales were down 1% compared with a 5% increase last year.

    • Old Navy comps were flat

    • Gap comps were negative 5% 

    • Banana Republic comps were negative 1%

Old Navy Separation

Old Navy Separation GPS also announced plans to separate into two publicly traded companies: Old Navy, and a yet-to-be-named company ("NewCo"), which will consist of the iconic Gap brand, Athleta, Banana Republic, Intermix and Hill City. The company announced a plan today to restructure the specialty fleet, including the closure of about 230 Gap specialty stores over the next two years. The company estimates an annualized sales loss of approximately $625 million as a result of these store closures. Additionally, the company estimates pre-tax costs associated with these actions to be about $250 million to $300 million, with the majority expected to be cash expenditures. The company estimates that these actions will result in annualized pretax savings of about $90 million

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