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Gap (GPS) Relies on Growth Efforts Amid Tough Macro Environment
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Gap (GPS - Free Report) has been gaining from strength in the Athleta brand and its cost-cutting actions. It is on track with the execution of its Power Plan 2023 plan.
An uptrend in the Zacks Consensus Estimate echoes the same sentiment. Earnings estimates for GPS’s current financial year have increased 4.9% to 64 cents over the past 30 days.
Let’s Delve Deeper
Gap has long been gaining from the continued momentum across its Athleta brand. The Athleta brand’s value-driven active and lifestyle categories, increased digital marketing investments, and focus on product strategy have been aiding sales.
Although net sales fell 11% in first-quarter fiscal 2023 for the Athleta brand, the metric grew 45% from the pre-pandemic levels. Segmental results gained from continued share gains. Increased focus on performance-active and active lifestyle products to capitalize on the evolving shopping trends bodes well. It has also emerged as one of the fastest-growing women's athleisure brands in North America. Driven by these factors, Athleta remains on track to reach $2 billion in net sales by fiscal 2023.
The company remains on track with aggressively undertaking cost-management actions in the fiscal first quarter. It has been making efforts to simplify and optimize its operating model and structure, including increasing spans of control and decreasing management layers to improve the quality and speed of decision-making, as well as creating a consistent organizational structure across all four brands.
These actions are expected to generate $300 million in annualized savings, of which half is expected to be realized in the latter half of fiscal 2023. Apart from these efforts, the company is expected to realize $250 million in annualized savings, as announced in the third quarter of fiscal 2022. Gap revealed plans to further optimize its marketing spend and rationalize its technology investments over the next few years.
The execution of its Power Plan 2023, which focuses on opening highly-profitable Old Navy and Athleta stores, while closing the underperforming Gap and Banana Republic stores, bodes well. As part of the plan, the company expects the Old Navy and Athleta brands to contribute about 70% of sales by 2023.
As part of its 350 store closure plan, the company expects to close 50-55 Gap and Banana Republic stores this year. It is likely to fulfill its 350 store closure plan by the end of 2023. GPS has already achieved 90% of the target in 2022. With the closing of underperforming Gap and Banana Republic stores, the company expects to realize $100 million in EBITDA savings on an annualized basis by the end of 2023. It anticipates leveraging its powerful platform to deliver competitive omni capabilities to meet customers’ needs, all fueled by its scaled operations.
GPS targets the e-commerce business to contribute 50% of sales by the end of 2023. Through the plan, the company expects to deliver consistent sales growth, margin expansion and strong operating cash flow.
Such cost-saving efforts led to an adjusted SG&A (as a percentage of sales) leverage of 60 basis points to 36.6%. Adjusted gross margin of 37.2% expanded 570 basis points (bps) year over year due to a 610-bps rise in adjusted merchandise margins, stemming from lower airfreight and improved promotions, offset by inflationary headwinds. The adjusted operating margin expanded 620 bps to 0.5%, driven by improved gross margin, stemming from reduced air freight expenses and improved promotional activity.
Consequently, Gap’s bottom line surpassed the Zacks Consensus Estimate and improved year over year. For the fiscal first quarter, adjusted earnings of a penny per share compared favorably against a loss of 44 cents reported in the first quarter of fiscal 2022. Notably, the second quarter and fiscal 2023 gross margins are envisioned to expand year over year.
Headwinds to Overcome
Gap has been reeling under uncertain macro and consumer environments. This led to a year-over-year sales decline of 6%. Comparable sales (comps) fell 3% on a year-over-year basis. Management anticipates fiscal 2023 sales to decrease in the low to mid-single-digit range compared to our estimate of a 4.6% decline. For second-quarter fiscal 2023, it expects sales to decrease in the mid to high-single-digit range, whereas it reported $3.86 billion last year.
Image Source: Zacks Investment Research
Conclusion
Although GPS shares have lost 7.3% in the past three months compared with the industry’s decline of 4.8%, strength in its Athleta brand, cost-saving efforts and the Power Plan 2023 are likely to aid. Topping it, a VGM Score of A and a long-term earnings growth rate of 12% raise optimism in this Zacks Rank #3 (Hold) stock.
Tecnoglass manufactures and sells architectural glass and aluminum products for the residential and commercial construction industries. TGLS currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and earnings per share suggests growth of 18.1% and 23.8%, respectively, from the year-ago reported figures. TGLS has a trailing four-quarter earnings surprise of 22.7%, on average.
Kroger, a renowned grocery retailer, currently carries a Zacks Rank of 2 (Buy). KR has a trailing four-quarter earnings surprise of 9.8%, on average.
The Zacks Consensus Estimate for Kroger’s current financial year’s earnings per share suggests growth of 6.6% from the year-ago reported figure. KR has an expected earnings per share growth rate of 6% for three to five years.
TJX Companies, which operates as an off-price apparel and home fashion retailer, carries a Zacks Rank #2 at present. The expected EPS growth rate for three to five years is 10.5%.
The Zacks Consensus Estimate for TJX Companies’ current financial-year sales and earnings suggests growth of 6.4% and 14.5%, respectively, from the year-ago period’s reported numbers. TJX has a trailing four-quarter earnings surprise of 4.4%, on average.
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Gap (GPS) Relies on Growth Efforts Amid Tough Macro Environment
Gap (GPS - Free Report) has been gaining from strength in the Athleta brand and its cost-cutting actions. It is on track with the execution of its Power Plan 2023 plan.
An uptrend in the Zacks Consensus Estimate echoes the same sentiment. Earnings estimates for GPS’s current financial year have increased 4.9% to 64 cents over the past 30 days.
Let’s Delve Deeper
Gap has long been gaining from the continued momentum across its Athleta brand. The Athleta brand’s value-driven active and lifestyle categories, increased digital marketing investments, and focus on product strategy have been aiding sales.
Although net sales fell 11% in first-quarter fiscal 2023 for the Athleta brand, the metric grew 45% from the pre-pandemic levels. Segmental results gained from continued share gains. Increased focus on performance-active and active lifestyle products to capitalize on the evolving shopping trends bodes well. It has also emerged as one of the fastest-growing women's athleisure brands in North America. Driven by these factors, Athleta remains on track to reach $2 billion in net sales by fiscal 2023.
The company remains on track with aggressively undertaking cost-management actions in the fiscal first quarter. It has been making efforts to simplify and optimize its operating model and structure, including increasing spans of control and decreasing management layers to improve the quality and speed of decision-making, as well as creating a consistent organizational structure across all four brands.
These actions are expected to generate $300 million in annualized savings, of which half is expected to be realized in the latter half of fiscal 2023. Apart from these efforts, the company is expected to realize $250 million in annualized savings, as announced in the third quarter of fiscal 2022. Gap revealed plans to further optimize its marketing spend and rationalize its technology investments over the next few years.
The execution of its Power Plan 2023, which focuses on opening highly-profitable Old Navy and Athleta stores, while closing the underperforming Gap and Banana Republic stores, bodes well. As part of the plan, the company expects the Old Navy and Athleta brands to contribute about 70% of sales by 2023.
As part of its 350 store closure plan, the company expects to close 50-55 Gap and Banana Republic stores this year. It is likely to fulfill its 350 store closure plan by the end of 2023. GPS has already achieved 90% of the target in 2022. With the closing of underperforming Gap and Banana Republic stores, the company expects to realize $100 million in EBITDA savings on an annualized basis by the end of 2023. It anticipates leveraging its powerful platform to deliver competitive omni capabilities to meet customers’ needs, all fueled by its scaled operations.
GPS targets the e-commerce business to contribute 50% of sales by the end of 2023. Through the plan, the company expects to deliver consistent sales growth, margin expansion and strong operating cash flow.
Such cost-saving efforts led to an adjusted SG&A (as a percentage of sales) leverage of 60 basis points to 36.6%. Adjusted gross margin of 37.2% expanded 570 basis points (bps) year over year due to a 610-bps rise in adjusted merchandise margins, stemming from lower airfreight and improved promotions, offset by inflationary headwinds. The adjusted operating margin expanded 620 bps to 0.5%, driven by improved gross margin, stemming from reduced air freight expenses and improved promotional activity.
Consequently, Gap’s bottom line surpassed the Zacks Consensus Estimate and improved year over year. For the fiscal first quarter, adjusted earnings of a penny per share compared favorably against a loss of 44 cents reported in the first quarter of fiscal 2022. Notably, the second quarter and fiscal 2023 gross margins are envisioned to expand year over year.
Headwinds to Overcome
Gap has been reeling under uncertain macro and consumer environments. This led to a year-over-year sales decline of 6%. Comparable sales (comps) fell 3% on a year-over-year basis. Management anticipates fiscal 2023 sales to decrease in the low to mid-single-digit range compared to our estimate of a 4.6% decline. For second-quarter fiscal 2023, it expects sales to decrease in the mid to high-single-digit range, whereas it reported $3.86 billion last year.
Image Source: Zacks Investment Research
Conclusion
Although GPS shares have lost 7.3% in the past three months compared with the industry’s decline of 4.8%, strength in its Athleta brand, cost-saving efforts and the Power Plan 2023 are likely to aid. Topping it, a VGM Score of A and a long-term earnings growth rate of 12% raise optimism in this Zacks Rank #3 (Hold) stock.
Stocks to Consider
Some better-ranked companies that investors may consider are Tecnoglass (TGLS - Free Report) , Kroger (KR - Free Report) and TJX Companies (TJX - Free Report) .
Tecnoglass manufactures and sells architectural glass and aluminum products for the residential and commercial construction industries. TGLS currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and earnings per share suggests growth of 18.1% and 23.8%, respectively, from the year-ago reported figures. TGLS has a trailing four-quarter earnings surprise of 22.7%, on average.
Kroger, a renowned grocery retailer, currently carries a Zacks Rank of 2 (Buy). KR has a trailing four-quarter earnings surprise of 9.8%, on average.
The Zacks Consensus Estimate for Kroger’s current financial year’s earnings per share suggests growth of 6.6% from the year-ago reported figure. KR has an expected earnings per share growth rate of 6% for three to five years.
TJX Companies, which operates as an off-price apparel and home fashion retailer, carries a Zacks Rank #2 at present. The expected EPS growth rate for three to five years is 10.5%.
The Zacks Consensus Estimate for TJX Companies’ current financial-year sales and earnings suggests growth of 6.4% and 14.5%, respectively, from the year-ago period’s reported numbers. TJX has a trailing four-quarter earnings surprise of 4.4%, on average.