Mind The Gap: Underwhelming Q2 Earnings Likely For The Apparel Retailer

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 29. We expect Gap’s stock to likely trade lower with revenue and earnings missing expectations marginally in fiscal Q2. GPS stock rose 13% since the beginning of this year to $23, underperforming the broader indices, with the S&P growing 18% over the same period. Notably, GPS’s peer Guess (NYSE: GES) has seen its stock fall 8% to $21 over the same course of time. The company is undergoing a turnaround process, investing in its brand growth.

In FY 2024, Gap expects slightly higher net sales while delivering mid-40% operating income growth and at least a 150 basis point gross margin expansion, with its Old Navy and Gap brands likely to continue to perform well. The consumer discretionary sector in general – and the apparel industry in particular – 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, confidence levels remain at levels lower than they were in 2019. Overall consumer confidence rose in August 2024 but remained within the narrow range that has prevailed over the past two years.

GPS stock has seen extremely strong gains of 65% from levels of $15 in early January 2021 to around $23 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in GPS stock has been far from consistent. Returns for the stock were -11% in 2021, -33% in 2022, and 97% 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 H, WMG, and AMZN, and even for the megacap stars GOOG, TSLA, and MSFT. 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 10% below the current market price. Our interactive dashboard analysis on Gap’s Earnings Preview: What To Expect in Q2? has more details.

(1) Revenues expected to be marginally below consensus estimates

Trefis estimates Gap’s FQ2 2024 revenues to be $3.6 Bil, slightly below market expectations. The company’s revenue grew 3% year-over-year (y-o-y) to $3.4 billion in Q1 2024, wherein its store sales rose by 3% while online sales grew by 5%. The company’s Q1 results showed a sales turnaround, with each of Gap’s four brands reporting same-store sales growth. Segment-wise, comparable sales for Old Navy, which makes up more than half of the company’s revenue, were up 3%. Gap brand saw a positive 3% comp for Q1 2024. The namesake brand is turning positive since underperforming locations have been closed. It should be noted that Banana Republic (comps up 1%) and Athleta (+5%) brands posted positive comp sales after continuing to struggle for a long time. Both these brands posted comp sales of -8% and -13%, respectively, in the year-ago period.

2) EPS likely to miss consensus estimates 

Gap’s FQ2 2024 earnings per share (EPS) is expected to come in at 36 cents per Trefis analysis, missing the consensus estimate. In Q1, GPS’s gross margins increased by 400 basis points, driven by improved inventory management (down 15% y-o-y to $1.95 billion). The company also posted close to 600 basis points of operating margin expansion, reaching an EPS of $0.41, compared to a loss last year.

(3) Stock price estimate lower than 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 nearly 10% lower than the current market price.