We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Gap (GPS) Gains 14.5% in 3 Months on Lower Freight, Cost Savings
Read MoreHide Full Article
Gap (GPS - Free Report) has been witnessing lower airfreight and improved promotional activity. Moving on, its aggressive cost-management actions bode well. Also, the company is on track with the execution of its Power Plan 2023 plan.
Driven by these factors, shares of this Zacks Rank #3 (Hold) company have gained 14.6% in the past three months against the industry’s decline of 2.6%.
That said, let’s delve deeper into the factors that are driving the stock.
Image Source: Zacks Investment Research
Factors Narrating GPS’s Growth Story
Gap has been on track with aggressive cost-management actions in the fiscal second quarter. The company 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.
The company is also likely to incur severance and other related costs from the optimization plan. Apart from these efforts, it 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 company is on track with 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. 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. It 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. Further, it expects to leverage its powerful platform to deliver competitive omni capabilities to meet customers’ needs, all fueled by its scaled operations. It 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.
Lower airfreight and improved promotional activity contributed to margins in second-quarter fiscal 2023. The gross margin of 37.6% expanded 310 basis points (bps) year over year while adjusted gross margin expanded 160 bps year over year. Meanwhile, the adjusted operating margin expanded 170 bps to 3.4%, driven by an improved gross margin and adjusted SG&A leverage.
Adjusted SG&A expenses declined 8% year over year. Adjusted SG&A, as a percentage of sales, leveraged 10 bps to 36.6% due to lower advertising expenses, payroll and technology investments resulting from cost-saving actions. Owing to these factors, adjusted earnings of 34 cents per share significantly improved from the 8 cents reported in the second quarter of fiscal 2022.
Management expects the gross margin to expand in fiscal 2023. This is likely to result from a 200-bps leverage due to the lapping of elevated airfreight costs in the prior year and a 100-bps margin gain from improved inventory position and promotional activity, offset by a 10-bps deleverage from inflationary costs.
Also, the company expects inflationary deleverage to turn into leverage in the second half of fiscal 2023 due to gains from improved commodity costs and ocean freight rates. ROD, as a percentage of sales, is expected to deleverage 70 bps year over year.
For third-quarter fiscal 2023, Gap anticipates the gross margin to be in line with the 38.7% reported last year. It envisions lower inflation and airfreight costs to be offset by 150 bps of ROD deleverage.
Hurdles on the Way
Gap has been reeling under uncertain macro and consumer environments, as well as the sale of the Gap China business. This led to sales decline of 8% year over year while comps fell 6% in second-quarter fiscal 2023. Management anticipates fiscal 2023 sales to decline in the mid-single digits compared with the low to mid-single-digit decline mentioned earlier. The guidance is in line with our estimate of a 5% decline.
For third-quarter fiscal 2023, Gap expects a sales decline in the low-double digits, in sync with our estimate of a 10.8% decline. This can be attributed to the sale of Gap China, which is expected to impact net sales by $70 million in the fiscal third quarter.
Bottom Line
Although uncertain macro and consumer environments are likely to linger in the near term, solid merchandise margins, cost-saving efforts and reduced air freight expenses are likely to help GPS drive growth ahead. The Zacks Consensus Estimate for GPS’s fiscal 2023 earnings for the current financial year has moved up 7.7% in the past 60 days. Topping it, a VGM Score of A raises optimism in the stock.
The Zacks Consensus Estimate for BJRI’s 2023 sales and EPS indicates 5.6% and 405.9% growth, respectively, from the year-ago period’s reported levels. It has a trailing four-quarter earnings surprise of 121.2%, on average.
Urban Outfitters, which engages in retail and wholesale of general consumer products, currently flaunts a Zacks Rank #1. The expected EPS growth rate for three to five years is 18%.
The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year earnings suggests growth of 57.1% from the year-ago reported number. URBN has a trailing four-quarter earnings surprise of 12.2%, on average.
Walmart, which operates a chain of hypermarkets, discount department stores and grocery stores, currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 5.5%.
The Zacks Consensus Estimate for Walmart’s current financial-year sales implies an improvement of 4.2% from the year-ago period’s actual. WMT has a trailing four-quarter earnings surprise of 12%, on average.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Gap (GPS) Gains 14.5% in 3 Months on Lower Freight, Cost Savings
Gap (GPS - Free Report) has been witnessing lower airfreight and improved promotional activity. Moving on, its aggressive cost-management actions bode well. Also, the company is on track with the execution of its Power Plan 2023 plan.
Driven by these factors, shares of this Zacks Rank #3 (Hold) company have gained 14.6% in the past three months against the industry’s decline of 2.6%.
That said, let’s delve deeper into the factors that are driving the stock.
Image Source: Zacks Investment Research
Factors Narrating GPS’s Growth Story
Gap has been on track with aggressive cost-management actions in the fiscal second quarter. The company 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.
The company is also likely to incur severance and other related costs from the optimization plan. Apart from these efforts, it 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 company is on track with 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. 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. It 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. Further, it expects to leverage its powerful platform to deliver competitive omni capabilities to meet customers’ needs, all fueled by its scaled operations. It 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.
Lower airfreight and improved promotional activity contributed to margins in second-quarter fiscal 2023. The gross margin of 37.6% expanded 310 basis points (bps) year over year while adjusted gross margin expanded 160 bps year over year. Meanwhile, the adjusted operating margin expanded 170 bps to 3.4%, driven by an improved gross margin and adjusted SG&A leverage.
Adjusted SG&A expenses declined 8% year over year. Adjusted SG&A, as a percentage of sales, leveraged 10 bps to 36.6% due to lower advertising expenses, payroll and technology investments resulting from cost-saving actions. Owing to these factors, adjusted earnings of 34 cents per share significantly improved from the 8 cents reported in the second quarter of fiscal 2022.
Management expects the gross margin to expand in fiscal 2023. This is likely to result from a 200-bps leverage due to the lapping of elevated airfreight costs in the prior year and a 100-bps margin gain from improved inventory position and promotional activity, offset by a 10-bps deleverage from inflationary costs.
Also, the company expects inflationary deleverage to turn into leverage in the second half of fiscal 2023 due to gains from improved commodity costs and ocean freight rates. ROD, as a percentage of sales, is expected to deleverage 70 bps year over year.
For third-quarter fiscal 2023, Gap anticipates the gross margin to be in line with the 38.7% reported last year. It envisions lower inflation and airfreight costs to be offset by 150 bps of ROD deleverage.
Hurdles on the Way
Gap has been reeling under uncertain macro and consumer environments, as well as the sale of the Gap China business. This led to sales decline of 8% year over year while comps fell 6% in second-quarter fiscal 2023. Management anticipates fiscal 2023 sales to decline in the mid-single digits compared with the low to mid-single-digit decline mentioned earlier. The guidance is in line with our estimate of a 5% decline.
For third-quarter fiscal 2023, Gap expects a sales decline in the low-double digits, in sync with our estimate of a 10.8% decline. This can be attributed to the sale of Gap China, which is expected to impact net sales by $70 million in the fiscal third quarter.
Bottom Line
Although uncertain macro and consumer environments are likely to linger in the near term, solid merchandise margins, cost-saving efforts and reduced air freight expenses are likely to help GPS drive growth ahead. The Zacks Consensus Estimate for GPS’s fiscal 2023 earnings for the current financial year has moved up 7.7% in the past 60 days. Topping it, a VGM Score of A raises optimism in the stock.
Key Picks
Some better-ranked stocks are BJ's Restaurants (BJRI - Free Report) , Urban Outfitters (URBN - Free Report) and Walmart (WMT - Free Report) .
BJ's Restaurants, which operates a chain of high-end casual dining restaurants in the United States, 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 BJRI’s 2023 sales and EPS indicates 5.6% and 405.9% growth, respectively, from the year-ago period’s reported levels. It has a trailing four-quarter earnings surprise of 121.2%, on average.
Urban Outfitters, which engages in retail and wholesale of general consumer products, currently flaunts a Zacks Rank #1. The expected EPS growth rate for three to five years is 18%.
The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year earnings suggests growth of 57.1% from the year-ago reported number. URBN has a trailing four-quarter earnings surprise of 12.2%, on average.
Walmart, which operates a chain of hypermarkets, discount department stores and grocery stores, currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 5.5%.
The Zacks Consensus Estimate for Walmart’s current financial-year sales implies an improvement of 4.2% from the year-ago period’s actual. WMT has a trailing four-quarter earnings surprise of 12%, on average.