Heavy Downward Revisions Suggest Analysts Are Falling Out Of The Gap Ahead Of Q4 Earnings

Gap, Inc. (GPS) – Consumer Discretionary – Speciality Retail | Reports February 25, After Market Closes

Speciality retailer Gap Inc., is scheduled to report fourth quarter earnings February 25, after the market closes. The Gap is coming off a tumultuous few years during which investors believed it was making its comeback, only to have shares freefall in 2015.

Fourth quarter earnings are expected to follow the company’s downward trend after a glum holiday season. The Estimize community calls for EPS of $0.55 and revenue of $4.429 billion, 2 cents below the Street on the bottom line, and roughly $10 million lower on the top line. However, our Select Consensus, a weighted average of the most historically accurate analysts and most recent estimates, is showing a slightly smaller loss of $9 million in revenue compared to the Street. The Estimize community has maintained a pessimistic stance on the Gap, revising EPS estimates down 7% since the company last reported. Compared to the same period last year, current estimates predict a YoY decline in EPS and revenue of 26% and 5%, respectively. On average, Gap has consistently delivered positive earnings surprises, beating the Estimize consensus 67% of the time, while trumping Wall Street 85% of the time.

This past year has not been kind to the Gap. Declining sales for the past three quarters weighed heavily on the company, with the stock down 41.3% in 2015. This comes as a result of persisting currency headwinds and disappointing performance of its core brands. Consistent with this trend, Gap recently reported a 3% decline in net sales on a constant currency basis and a 5% decline in comparable store sales across its core brands in December 2015.

Old Navy, once the savior for this retailer, also posted -7% comp store sales as the brand continues to struggle. Competitive pressure has played a major role in Gap’s soft sales outlook, as fast fashion companies including H&M, Forever21 and Zara have effectively cut into Gap’s already dwindling market share. The retailer operates in a highly fragmented market where it has failed to offer high quality, distinguished products at a competitive price. Moreover, the company is committed to a store growth strategy with a focus on Asia, its Athleta brand and global outlet stores. Unfortunately, these efforts are not expected to mask Gap’s glaring weaknesses when it reports fourth quarter earnings.