Will Gap Stock Trade Lower Post Q3 Results?

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 third-quarter results on Thursday, November 17. We expect Gap’s stock to likely trade lower with revenue and earnings missing expectations. Gap’s inventories rose 23% in 2021, then further increased 34% and 37% on a year-over-year (y-o-y) basis in the first and second quarters of 2022, respectively. In fact, the company had to write off $58 million in unproductive inventory, mostly at Old Navy, in Q2. It is likely that Gap will have to resort to margin-crushing markdowns in order to lower its inventories. As of the first half of 2022, Gap’s gross and operating margins have already declined significantly y-o-y, and additional markdowns will only exacerbate that trend. We expect inflationary headwinds, sluggish sales of Gap products in China, and size and assortment problems to continue to negatively impact the company’s third-quarter results. The only bright spot so far has been the comp growth in its Banana Republic segment, which benefited from the brand’s relaunch last year. Otherwise, Gap’s comps growth abruptly declined across its Old Navy, Gap, and Athleta banners. GAP has withdrawn its full-year guidance, and it continues to search for a permanent CEO as its inventories rise and margins decline.

Our forecast indicates that Gap’s valuation is $10 per share, which is 19% lower than the current market price. Look at our interactive dashboard analysis on Gap’s Earnings Preview: What To Expect in Q3? for more details.

(1) Revenues expected to come slightly below consensus estimates

Trefis estimates Gap’s FQ3 2022 revenues to be $3.7 Bil, marginally below the market expectations. In Q2, Gap’s revenue fell 8% y-0-y to $3.86 billion on a 10% drop in comparable sales. The company’s 8% comps growth at Banana Republic failed to offset a 15% drop at Old Navy, a 7% decline at Gap, and an 8% slump at Athleta. We expect full-year 2022 revenues to decline.

2) EPS likely to miss consensus estimates

Gap’s FQ3 2022 earnings per share (EPS) is expected to come in at a loss of 6 cents per Trefis analysis, missing the consensus estimate. Its adjusted net income tumbled 89% y-o-y to $30 million, or $0.08 per share in Q2.

(3) Stock price estimate lower than the current market price

Going by our Gap’s Valuation, with an adjusted 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 19% lower than the current market price.