Gap Stock Falls Despite Solid Q1 Earnings & Higher Comparable Sales

The Gap, Inc. GAP reported first-quarter fiscal 2024 results, wherein the bottom and top lines surpassed the Zacks Consensus Estimate and grew year over year. Quarterly results benefited from immense strength in brands and higher market share. It has been smoothly progressing on the reinvigoration of its brands. The company has been actively managing costs. Management is focused on its strategic priorities, such as driving financial and operational rigor, reinvigorating the brands, reinforcing its operating platform and energizing culture.GAP posted earnings of 51 cents per share, which surpassed the Zacks Consensus Estimate of 44 cents and jumped 24% from the prior-year quarter’s figure. (See the Zacks Earnings Calendar to stay ahead of market-making news.)Net sales inched up 2% year over year to $3.46 billion and beat the consensus estimate of $3.42 billion. Comparable sales (comps) also rose 2% year over year. The company saw sturdy results at Old Navy, momentum at Gap and progress at Banana Republic. Online sales jumped 6% year over year, accounting for 39% of the total sales. Store sales were flat year over year. The Gap, Inc. Price, Consensus and EPS Surprise The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. QuoteDespite robust sales and earnings in first-quarter fiscal 2025, Gap’s shares fell more than 15% in the after-hours session yesterday. With regard to tariffs, if the existing tariffs of 30% on the majority of imports from China and 10% on most imports from other countries remain for the rest of the year, management forecasts a gross incremental cost of about $250-$300 million. The company has been making strategies to offset more than half of the amount. Considering the mitigation efforts, Gap expects a balance net impact of around $100-$150million to fiscal 2025 operating income mainly weighted to the back half of the year. Shares of this Zacks Rank #3 (Hold) company have lost 13.3% compared with the industry’s 10.7% decline over the past six months.GAP’s Brand-Wise Sales & Comps PerformanceOld Navy: Net sales at Old Navy Global edged up 3% year over year to $2 billion. Comps rose 3% year over year. This marked the brand’s ninth straight quarter of market share gains, thus strengthening its leadership position as the major specialty apparel brand and retailer in the United States. Sales for Old Navy Global beat our model’s estimate of $1.9 billion.Gap Global: Net sales jumped 5% year over year to $724 million while comps increased 5%, highlighting the sixth straight quarter of positive comps. The company’s brand-reinvigoration efforts aided the performance. We note that the brand generated its eighth straight quarter of increased market share. Sales for Gap Global surpassed our model’s estimate of $707.3 million.Banana Republic: Net sales dropped 3% year over year to $428 million, while comps were flat year over year. Sales lagged our estimate of $447.7 million. The company’s focus on reestablishing the brand and improving fundamentals aided results.Athleta: Net sales dropped 6% year over year to $308 million and comps also dipped 8%. Net sales were below our estimate of $332.3 million. Although the brand had a tough quarter, the company continues to reset the brand as well as boost product and marketing.GAP’s Margins & CostsThe gross margin of 41.8% rose 60 basis points (bps) year over year. Meanwhile, we estimated the adjusted gross margin to be 41.3%.The merchandise margin was flat year over year, benefiting from inventory-management efforts. Rent, occupancy and depreciation (ROD), as a percentage of sales, leveraged 60 bps year over year. Further, the operating margin of 7.5% grew 140 bps in the reported quarter from last year’s adjusted operating margin. Our model anticipated an adjusted operating margin of 6.4%.Operating expenses were $1.2 billion, down 0.3% year over year.GAP’s Financial Health SnapshotGap ended the fiscal first quarter with cash and cash equivalents of $1.98 billion, up 29.4% from the year-ago period. As of May 3, 2025, it had a total stockholders’ equity of $3.3 billion and a long-term debt of $1.5 billion.At the end of the fiscal first quarter, merchandise inventory was up 7.7% year over year to $2.1 million.As of May 3, 2025, the company used $140 million in cash from operating activities and had a negative free cash flow of $223 million. It paid cash dividends of $61 million and repurchased shares of $70 million in the 13 weeks ended May 3, 2025. It had roughly $374 million available in its share repurchase authorization. The company’s board has approved a second-quarter fiscal 2025 dividend, raising it to 16.50 cents per share.Capital expenditure was $83 million in first-quarter fiscal 2025. For fiscal 2025, capital expenditure is expected to be $600 million.As of May 3, 2025, Gap had around 3,500 stores in more than 35 countries, of which 2,496 were company-operated. Net store closures for fiscal 2025 are likely to be about 35.What to Expect From GAP in Fiscal 2025?Management expects the company to continue operating in a highly dynamic landscape for fiscal 2025. GAP’s outlook acknowledges the potential for higher uncertainties with respect to consumer behavior, and global economic and geopolitical conditions. However, the fiscal 2025 outlook does not reflect the potential tariff impacts.For fiscal 2025, management continues to project sales growth of 1-2% from $15.1 billion recorded in fiscal 2024. This assumes continued strength at Old Navy and Gap, stabilizing performance at Banana Republic and a long recovery at Athleta.The company forecasts the gross margin to rise slightly for the fiscal year on continued rigor and executional excellence. Almost equal amounts will come from ROD leverage and merchandise margin. Regarding SG&A, the company has been driving improvement in the cost structure, with roughly $150 million in cost savings likely to be accomplished in fiscal 2025. A part of the cost saving will be reinvested in future growth. It expects SG&A to leverage slightly in fiscal 2025.For fiscal 2025, operating income is still projected to rise 8-10% from the prior year’s figure of $1.11 billion, excluding any tariff impacts. Management presently estimates a net impact of around $100-$150 million to the operating margin in the current fiscal year based on the existing tariff policy. The effective tax rate is estimated to be roughly 26%. Net interest income is expected to be nearly $15 million compared with $25 million recorded in fiscal 2024.For the fiscal second quarter, net sales are likely to be flat with the year-earlier quarter. This includes a one percentage point impact with respect to the lapping of the benefit seen last year from higher revenues related to its credit card agreement, which are likely to recur in fiscal 2025. The second-quarter view is based on presently enacted tariffs. The gross margin is likely to be similar to the first quarter. SG&A, as a percentage of net sales, is likely to leverage slightly in the second quarter.Key Picks in RetailSome better-ranked stocks are Urban Outfitters URBN, Canada Goose GOOS and Genesco GCO.Urban Outfitters, a lifestyle specialty retailer offering apparel and accessories, sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here. The Zacks Consensus Estimate for Urban Outfitters’ current financial-year’s earnings and sales implies growth of 20.9% and 8%, respectively, from the year-ago actuals. URBN delivered a trailing four-quarter average earnings surprise of 29%.Canada Goose is a global outerwear brand. GOOS is a designer, manufacturer, distributor and retailer of premium outerwear for men, women and children. It carries a Zacks Rank #2 (Buy) at present.The Zacks Consensus Estimate for Canada Goose’s current financial-year’s earnings and sales implies growth of 10% and 2.9%, respectively, from the year-ago actuals. GOOS delivered a trailing four-quarter average earnings surprise of 57.2%.Genesco, a branded company that sells footwear and accessories, currently has a Zacks Rank of 2.The Zacks Consensus Estimate for GCO’s current financial-year’s earnings and sales implies growth of 63.8% and 0.6%, respectively, from the year-ago actuals. GCO delivered a trailing four-quarter average earnings surprise of 37.2%.5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.Today, See These 5 Potential Home Runs >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Urban Outfitters, Inc. (URBN): Free Stock Analysis Report The Gap, Inc. (GAP): Free Stock Analysis Report Genesco Inc. (GCO): Free Stock Analysis Report Canada Goose Holdings Inc. (GOOS): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks