Gap’s Q2 Earnings Preview: What Are We Watching?

Gap Inc. stock (NYSE: GPS), a specialty retailer selling casual apparel, accessories, and personal care products for men, women, and children under the Gap, Old Navy, and Banana Republic brands, is scheduled to report its second-quarter results on Thursday, August 25. We expect Gap’s stock to likely see little to no movement with revenue slightly ahead but earnings missing expectations marginally. The company faced headwinds with supply chain issues weighing heavily on its performance in 2021, particularly driven by longer transit times from the West Coast port delays and the sudden and prolonged closure of factories in Vietnam. To avoid congested ports, Gap chose to ship a larger portion of its merchandise via air freight services. And, these more expensive shipping options also weighed on its profits in 2021.  But, even as demand outpaced available supply, big buyers like Gap were able to get the inventory they thought they wanted. That all changed, when 2022 came around. The retailer had accumulated the highest inventory level in its history by the end of the first quarter. And now, Gap faces the challenge to sell its overflowing and mostly spring season inventory in the summer season. To make matters worse, this is also the time when the Fed is attempting to curtail consumer spending. We expect inflationary headwinds, sluggish sales of Gap products in China, and size and assortment problems to continue to negatively impact the company’s second-quarter results.

Gap slashed its full-year guidance for adjusted operating margin from a range of 6% to 6.5% to a range of 1.5% to 2.5% during its Q1 earnings call. Then on July 11, Gap CEO Sonia Syngal stepped down without a permanent replacement. The company’s management again cut operating margin guidance, down to a range of zero to slightly negative. Gap hopes to reset its operational model in order to get into better positions by the second half of the year when critical back-to-school and holiday shopping seasons will play a key role in their overall performance for the entire year.

Our forecast indicates that Gap’s valuation is $10 per share, which is in line with the current market price. Look at our interactive dashboard analysis on Gap’s Earnings Preview: What To Expect in Q2? for more details.

(1) Revenues expected to come slightly ahead of consensus estimates

Trefis estimates Gap’s FQ2 2022 revenues to be $3.9 Bil, marginally ahead of the market expectations. In Q1, Gap’s revenue fell 13% year-over-year (y-o-y) to $3.5 billion on a 14% drop in comparable sales. Both in-store and online sales fell double-digit percentages, and margins took huge hits due to freight costs and higher discounts. While higher end brands Banana Republic and Athleta saw y-o-y increases in net sales, management cited inflationary pressures as a reason for Old Navy and Gap’s struggles. Old Navy’s and Gap’s revenues declined 19% and 11%, respectively, in the first quarter.

2) EPS likely to miss consensus estimates

Gap’s FQ2 2022 earnings per share (EPS) is expected to come in at a loss of 10 cents per Trefis analysis, missing the consensus estimate. The company swung to a larger loss of $162 million in Q1 2022 (or -$0.44 per share) from a profit of about $166 million in Q1 2021 (or $0.43 per share).

(3) Stock price estimate similar to the current market price

Going by our Gap’s Valuation, with an EPS estimate of $1.36 and a P/E multiple of 7.0x in fiscal 2022, this translates into a price of $10, which is in line with the current market price.