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After Weak Q2 Comps, Should You Buy Gap (GPS) Stock?

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On Thursday, iconic but floundering retailer Gap Inc. (GPS - Free Report) reported its fiscal 2016 second quarter results. Adjusted diluted earnings per share of 60 cents beat the Zacks estimate of 59 cents and fell 6.3% year-over-year. Total sales just edged past our consensus estimate, coming in at $3.85 billion for the quarter and decreased 2% year-over-year.

GPS is seeing little movement in after-hours trading, down around 0.89% as of 4:42 PM EST.

Comparable sales for each of Gap’s three main brands were weak, but to be expected. Gap Global saw a decrease of 3% versus a decrease of 6% in the prior year. Old Navy Global comps were flat this quarter, a decline from last year’s gain of 3%. Banana Republic Global reported the most disappointing comps overall, declining 9% versus a decrease of 4% last year.

Gap reported Q2 operating expenses of $1.16 billion, with marketing expenses totaling $131 million.

“During the quarter, we took critical steps to execute our restructuring plans and to build a more efficient global brand model with greater potential for growth,” said Art Peck, CEO of Gap.

“While I remain unsatisfied with the pace of improvement across the business, I am encouraged by the underlying signs of progress in Q2, as demonstrated by healthier merchandise margins. Our management teams share my urgency to create fundamental change that will drive long-term performance,” he continued.

Looking ahead, Gap now expects full-year adjusted diluted EPS to be in the range of $1.87 to $1.92. Adjusted operating margin is now forecasted to be about 8.5% in the full fiscal year.

Should You Buy GPS Stock?

Beating top and bottom line estimates—and by only a slim margin—seemed to be the only bright spot in Gap’s second quarter performance, but its weak comparable store sales should not come as a surprise. Gap has been failing to win over its once-devoted customer base for years now, especially at its namesake and Banana Republic brands.

Despite continued negative quarterly performance, Gap is taking critical steps in order to turn its businesses around, but it definitely needs to step up its game. Product at its three core brands desperately needs to improve, as it’s continually missing the mark with its customers.

It’s Athleta division, a women’s and girl’s athleisure retailer, has the potential to be a big money maker for the company. Similar in style to Lululemon (LULU - Free Report) , its product is on-trend and fashionable, something its other brands have trouble executing. Gap should continue to market and expand Athleta.

In terms of estimate revision activity, Gap has actually seen some positive changes. For the next quarter, three analysts have revised upwards while 5 have revised downwards, and its current fiscal year has seen 13 positive revisions within the last 30 days. Make sure to watch out for these revisions in the near future, especially in the next few days. Currently, GPS is a Zacks Rank #3 (Hold).

Year-to-date, Gap has gained just over 3%. Like many of you, I am hoping the khaki-loving brand will make a full turnaround, but as of right now, GPS does not appear to be a smart retail pick for your portfolio.

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