Stock of the day 19/08/2015 – Gap Inc

Sitting at near 2 and a half year lows, Gap’s 2015 hasn’t exactly gone to plan; can that change when it announces its Q2 2015 results on Thursday?

After starting the year at $42.42, Gap quickly hit a high of $43.87 in the first week of January. The start of February then saw Gap report a net sales increase of 5% for its fourth quarter 2015, but with an 11% year-on-year decline in its ‘Gap Global’ brand, the overall figure only saved by an 11% jump in ‘Old Navy’ sales. This set off a minor decline, but the company soon bounced back across March to hover around the $43 for most of that month.


(Source: IT-Finance.com 19/08/2015)

From that point onwards, however, things began to unravel. Same-store sales for the ‘Gap’ brand in March, announced in the middle of April, saw a 7% decline, with ‘Banana Republic’ also struggling, posting a 3% fall; once again it was ‘Old Navy’ to the rescue, rising 14% to see Gap’s total sales increase by 2%. However, investors were more than aware of Gap’s reliance on its cheapest brand and these figures set off a slump that hasn’t shown any real signs of slowing down since.

Ahead of its first quarter and April sales results in the middle of May the company had fallen to $39.64, approaching a 6 month low. Things got worse when the results were actually announced; for April ‘Gap’ sales fell 15%, ‘Banana Republic’ dropped 15% and, most damningly, ‘Old Navy’ saw a 6% tumble compared to 18% growth for the same month in 2014. Predictably the first quarter figures weren’t much better; a meagre 3% jump in ‘Old Navy’ sales couldn’t compensate for a 10% drop in ‘Gap’ and a 8% drop in ‘Banana Republic’, leading Gap Inc to a 4% fall in total comparable sales.

By the middle of June Gap had slipped to $37.50 and despite a brief rebound across the rest of that month weak June and July sales caused the stock to tank even further, leading it to a near 2 and a half year low of $33.92 by the middle of August. Gap has only just bounced away from that price, and is currently trading at $34.64 (IT-Finance.com, 19/08/2015).

So what is Gap doing about its haemorrhaging sales? Well, the company announced back in June that it is aiming to close 21% of its US ‘Gap’ stores by January 2016, in an attempt to stall the cannibalisation that has occurred due to brand’s over-eager bricks-and-mortar presence. The logic is that by reducing the presence of ‘Gap’, not only will the flagship store recover, but that, in a slightly less saturated market, ‘Banana Republic’ can stop teetering on the edge of larger losses and ‘Old Navy’ can continue its fairly robust performance.

The company is also trying to speed up its supply chain to avoid ‘fashion misses’ that occur when trying to predict trends a year in advance, whilst it intends to expand and improve its online department, with special focus on mobile shopping.

In terms of its results, analysts are expecting Gap Inc to post earnings per share of $0.64 compared to $0.70 at this point last year, alongside sales of $3.91 billion against $3.98 billion in Q2 2014. The company has a consensus rating of ‘Hold’ with an average target price of $36.56.