With The Stock Almost Flat This Year, Will Q1 Results Drive Gap’s Stock Higher?

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 first-quarter results on Thursday, May 30. We expect Gap’s stock to likely see little to no movement with revenue beating but earnings missing expectations marginally in fiscal Q1. GPS stock fell 3% since the beginning of this year, underperforming the broader indices, with the S&P growing 11% over the same period. Notably, GPS’ peer Guess (NYSE: GES) has seen its stock rise 4% over the same course of time.

In FY 2024, Gap calls for roughly flat net sales while delivering low to mid-teens operating income growth and at least a 50 basis point gross margin expansion. The company expects Old Navy and Gap brands to continue to perform well in FY’24. At the same time, Athleta will struggle in the first half of the year because of the brand’s elevated discounting from 2023 and Banana Republic will take longer to recover. For Q1, the company expects sales to be flat from $3.3 billion in Q1 2023, and gross margin to expand by 100 basis points from 37.2% in the same quarter last year. The consumer discretionary sector, and even more so the apparel industry, is highly cyclical and dependent on consumer spending which is, in turn, associated with consumer confidence. While consumer confidence in the U.S. has recovered from the Covid-19 pandemic lows, still confidence levels remain at lower levels compared to 2019 levels. In March 2024, the Consumer Confidence Index remained unchanged at 104.7, compared to the 104.8 level in February, indicating skepticism in consumers’ assessment of the present situation (for the short term).

GPS stock has seen little change, moving slightly from levels of $20 in early January 2021 to around $20 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Overall, the performance of GPS stock with respect to the index has been quite volatile. Returns for the stock were -13% in 2021, -36% in 2022, and 85% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that GPS underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GPS face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Our forecast indicates that Gap’s valuation is $21 per share, which is almost in line with the current market price. Look at our interactive dashboard analysis on Gap’s Earnings Preview: What To Expect in Q1? for more details.

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

Trefis estimates Gap’s FQ1 2024 revenues to be $3.6 Bil, slightly ahead of the market expectations. Gap’s sales have failed to pick up any traction in recent years. The company’s revenue fell 5% year-over-year (y-o-y) to $14.9 billion in FY 2023. Segment wise, Old Navy, which makes up more than half of the company’s revenue, comparable sales were down 1%, with positive comp performance in the second half of the year, and market share gains in all four quarters. Gap brand saw a positive 1% comp for the full year 2023. The namesake brand is turning positive since underperforming locations have been closed. However, Banana Republic (comps down 7%) and Athleta (-12%) brands still continue to struggle. The positive here is that both Banana Republic and Athleta brands account for less than 20% of the total company business.

2) EPS likely to miss consensus estimates marginally

Gap’s FQ1 2024 earnings per share (EPS) is expected to come in at 13 cents per Trefis analysis, marginally missing the consensus estimate. Considering the revenue decline in FY 2023, the company’s gross profits have increased 8% y-o-y in 2023, which notes an uptick in profitability to $1.34 per share compared to a negative $0.55 per share in 2022.

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

Going by our Gap’s Valuation, with an earnings per share estimate of $1.40 and a P/E multiple of 15.0x in fiscal 2024, this translates into a price of $21, which is similar to the current market price.