Gap (GPS) Trades Slightly Lower After Initial Enthusiasm Regarding Its Turnaround Strategies Fizzle
3:46 pm Monday, August 29th, 2022
Following a bit of a rollercoaster ride to begin today’s trading session, shares of Gap (GPS) are trading lower today despite the apparel retailer posting upside on its top and bottom lines in Q2 (Jul). Shares did initially pop in early trading, likely due to enthusiasm surrounding GPS’s strategy to kickstart its turnaround efforts. However, after the smoke cleared, it was apparent that GPS’s turnaround would be no simple task. Additionally, the company withdrew its FY23 outlook due to many headwinds, including being amid a turnaround, a CEO transition, and an uncertain macro-environment, making it difficult to provide an accurate forecast.
Regarding GPS’s hunt for a new CEO, Executive Chairman and interim CEO Bobby Martin did not provide too many details, only that the Board is actively evaluating potential candidates and is working swiftly to find a qualified individual.
Turning to Q2 numbers, adjusted EPS of $0.08 and revs of $3.86 bln, a decline of 8.4% yr/yr, both topped estimates. However, comparable store sales of -10% came up short of analyst expectations.
GPS remains bullish on Old Navy’s value proposition going forward, mentioning that it is the #2 brand in the apparel market by share and remains its foothold for acceleration and expansion.
The Gap banner also saw sales fall in Q2, slipping by 10% yr/yr to $881 mln.
A few bright spots stemmed from the Banana Republic and Athleta banners, which saw revs jump by 9% and 1% yr/yr, respectively.
However, these silver linings are not peaking through an otherwise dark and cloudy quarter. In addition to turning around the business, GPS is dealing with other headwinds, such as cost inflation, which drove an 850 bp contraction in merchandise margins in Q2, and consumer inflation, which is spurring many of GPS’s customers to trade down. Although GPS’s initiatives are ambitious, we continue to believe the right strategy at the moment is to wait until results improve.
