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Here's What You Should Know Ahead of Gap's (GPS) Q3 Earnings

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The Gap, Inc. (GPS - Free Report) is scheduled to report third-quarter fiscal 2020 numbers on Nov 24, after market close. In the last reported quarter, the company delivered an earnings surprise of 86.5%. However, the bottom line lagged the consensus mark by 38.57%, on average, in the trailing four quarters.

The Zacks Consensus Estimate for fiscal third-quarter earnings of 29 cents has moved north by 16% in the past 30 days. However, the consensus estimate suggests a 45.3% decline from the prior-year quarter’s earnings of 53 cents. For revenues, the consensus mark is pegged at $3.8 billion, indicating a decline of 4.9% from the figure reported in the year-ago quarter.

Key Factors to Note

Gap has been witnessing strong online sales amid the pandemic, which has been contributing to same-store sales (comps) growth. Notably, its e-commerce channel recorded 95% growth in the fiscal second quarter. Driven by the robust e-commerce show and comps growth at reopened stores, the company delivered positive comps of 13% in the fiscal second quarter. To further bolster digital sales, it has introduced two payment options namely PayPal and AfterPay this Fall. These actions are likely to have contributed to sales and comps growth in the to-be-reported quarter.

The Gap, Inc. Price and EPS Surprise


The Gap, Inc. Price and EPS Surprise

The Gap, Inc. price-eps-surprise | The Gap, Inc. Quote

Also, the reopening of nearly 90% of its global store fleet as of Aug 1 is likely to have aided sales recovery in the fiscal third quarter. The company has been witnessing robust store traffic and productivity at reopened stores, particularly Old Navy and Athleta. Additionally, delivery facilities like curbside pickup and buy online, pickup in store have been rolled out in more than 1,500 Old Navy, Athleta and Banana Republic stores, which are expected to bolster both online and store sales. Also, the company has been operating more than 2,100 stores as mini fulfillment hubs through ship-from-store and more than 500 stores as curbside pickup locations.

In the last reported quarter’s earnings call, management had predicted sales resurgence from reopened stores to contribute to top-line gains on a sequential basis. Management also remains optimistic about growth of Old Navy and Athleta brands.

The company has been benefitting from the booming mask business, which led to rake in $135 million in sales in the fiscal second quarter. Gap’s move to sell face masks, as the use of face masks became mandatory to curb the spread of the deadly virus, has proved beneficial. All of the company’s brands, including the Gap brand, Banana Republic and Old Navy, have been selling face masks of different patterns and colors in stores and online. Further, the company introduced a business-to-business (“B2B”) product program to supply cloth face masks to companies and organizations as they open up. Gains from these moves are expected to get reflected in the company’s fiscal third-quarter results.

However, Gap has been witnessing loss of in-store sales for the past few quarters, which weighed on its top line. Notably, its in-store sales declined 48% in the fiscal second quarter as stores remained closed for some parts of the quarter. Brand-wise, the company witnessed significant declines in in-store sales for all formats, with Old Navy down 36%, Gap down 55%, Banana Republic down 71% and Athleta down 45%. Soft in-store sales across some brands, despite the reopening of majority of stores, may have impacted the top line to some extent in the to-be-reported quarter.

Moreover, the company has been witnessing headwinds at the Banana Republic brand. The brand’s product mix has been unfavorable due to a shift in consumers’ demands to more casual fashion to meet stay-at-home requirements, which served as a disadvantage to the brand’s work wear assortments. However, Gap is focused on adjusting to consumer preferences and improving inventory mix. We expect continued declines in the brand’s sales to have hurt the top line to some extent.

Gap has been reeling under significant impacts of the loss of in-store sales for all formats, stemming from temporary store closures for the past few months due to the pandemic. Further, a shift in consumers’ demands to more casual fashion to adapt to the stay-at-home trend led to an unfavorable product mix at its Banana Republic brand. Prior to the onset of the ongoing pandemic, the inconsistent execution of product and marketing messages acted as headwinds.

Apart from these, elevated costs related to the pandemic have been weighing on margins. Also, deleverage in merchandise margin, owing to the rise in shipping expenses to fulfill the increased online orders and the company’s decision to leverage its stores to fulfill online demand, is likely to have hurt gross margin. Cumulatively, the impacts of these factors are likely to get reflected in fiscal third-quarter margins and bottom line.

Zacks Model

Our proven model doesn’t conclusively predict an earnings beat for Gap this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Gap has a Zacks Rank #3 and an Earnings ESP of -1.20%.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat.

Signet Jewelers Limited (SIG - Free Report) currently has an Earnings ESP of +13.95% and it sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Central Garden & Pet Company (CENT - Free Report) has an Earnings ESP of +57.14% and a Zacks Rank #2 at present.

Best Buy Co. Inc. (BBY - Free Report) currently has an Earnings ESP of +14.92% and a Zacks Rank #2.

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