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Will Higher Costs Continue to Mar Gap's (GPS) Earnings in Q1?

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The Gap, Inc. (GPS - Free Report) is scheduled to report first-quarter fiscal 2021 numbers on May 26. The company is likely to register a decline in the top and bottom lines when it reports first-quarter fiscal 2022 results.

The Zacks Consensus Estimate for the fiscal first-quarter bottom line is pegged at a loss of 11 cents per share, suggesting a sharp decline of 122.9% from earnings of 48 cents reported in the prior-year quarter. The loss estimate for the fiscal first quarter has widened by 2 cents in the past seven days. For revenues, the consensus mark is pegged at $3.43 billion, indicating a 14% decline from that reported in the year-ago quarter.

In the last reported quarter, the company reported an earnings surprise of 85.7%. The bottom line beat the consensus mark by 647.4%, on average, in the trailing four quarters.

The Gap, Inc. Price and EPS Surprise

 

The Gap, Inc. Price and EPS Surprise

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

Key Factors to Note

Gap has been witnessing supply-chain headwinds, including higher air freight costs. The increase in air freight has been resulting in lower merchandise margins, which have been denting gross margins. The persistence of higher freight costs is likely to have marred the company’s gross margin in the fiscal first quarter.

Additionally, the company has been reporting higher operating expenses, owing to increased investments in marketing and technology, and a rise in compensation and fulfillment costs. The company’s focus on marketing and technology investments, along with higher compensation expenses, is expected to have weighed on its bottom line in the to-be-reported quarter.

Also, higher inventory levels are expected to have acted as deterrents.

On its last reported quarter’s earnings call, management predicted inventory levels in the fiscal first quarter to remain high due to earlier bookings to offset longer in-transit times. The persistence of higher inventory levels is likely to have hurt the company’s profitability in the to-be-reported quarter.

However, strength in Old Navy and Athleta brands is likely to have been upsides for Gap. The company’s powerhouse brand Old Navy is expected to have gained from strong demand for the loyalty launch and the introduction of inclusive sizing via the BODEQUALITY launch.

The Athleta brand’s value-driven active and lifestyle categories, increased digital marketing investments, and focus on product strategy have been aiding sales. Athleta is likely to have witnessed strength in the activewear category and the launch of its online fitness and wellness platform, AthletaWell. The launch of Athleta’s Canada online business, and efforts to expand its base internationally with franchise partnerships in Costa Rica and Europe also bode well.

The company’s solid online show is expected to have continued in the quarter under review. Gains from its e-commerce business have been contributing significantly to its Gap, Old Navy and Athleta brands. Its online business has also been benefiting from the company’s dominant omni-channel strength, increased focus on mobile experience and the launch of the native Android app.

Zacks Model

Our proven model does not conclusively predict an earnings beat for Gap this season. 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 #5 (Strong Sell) and an Earnings ESP of 0.00%.

Stocks With Favorable Combination

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 this season:

The Kroger Co. (KR - Free Report) currently has an Earnings ESP of +2.95% and a Zacks Rank of 2. The company is expected to have registered top and bottom-line growth in first-quarter fiscal 2022. The Zacks Consensus Estimate for KR’s quarterly revenues is pegged at $43.2 billion, which suggests a rise of 4.7% from the figure reported in the prior-year quarter.

You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Kroger’s quarterly earnings moved up 6.7% in the last 30 days to $1.27 per share, suggesting 6.7% growth from the year-ago quarter's reported number. KR has delivered an earnings beat of 22.1%, on average, in the trailing four quarters.

Designer Brands (DBI - Free Report) has an Earnings ESP of +4.35% and a Zacks Rank #2 at present. The company is expected to have registered top and bottom-line growth in first-quarter fiscal 2022. The Zacks Consensus Estimate for DBI’s quarterly revenues is pegged at $806.7 million, which suggests a rise of 14.7% from the figure reported in the prior-year quarter.

The Zacks Consensus Estimate for Designer Brands’ quarterly earnings moved up by a penny in the last 30 days to 23 cents per share, suggesting 91.7% growth from the year-ago quarter's reported number. DBI has delivered an earnings beat of 112.8%, on average, in the trailing four quarters.

Casey's General Stores (CASY - Free Report) currently has an Earnings ESP of +7.07% and a Zacks Rank #3. The company is anticipated to have registered top and bottom-line growth in fourth-quarter fiscal 2022. The Zacks Consensus Estimate for CASY’s quarterly earnings moved up by a penny in the last seven days to $1.49 per share, suggesting 33% growth from the year-ago quarter's reported number.

The Zacks Consensus Estimate for Casey's quarterly revenues is pegged at $3.4 billion, suggesting growth of 44.7% from the figure reported in the prior-year quarter. CASY has delivered an earnings beat of 21.6%, on average, in the trailing four quarters.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.