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Can Gap's (GPS) Robust Strategies Fuel Growth in Q4 Earnings?

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Gap Inc. (GPS - Free Report) is slated to report fourth-quarter fiscal 2017 results on Mar 1. The company has been progressing well backed by its solid focus on enhancing product quality and responsiveness to changing consumer trends. Apparently, the company has pulled off a positive earnings surprise in three consecutive quarters, with a trailing four-quarter average beat of 10.3%.

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 59 cents, reflecting year-over-year growth of 15.7%. Also, the estimate has moved up by a penny in the last seven days.

Gap, Inc. (The) Price, Consensus and EPS Surprise

Gap, Inc. (The) Price, Consensus and EPS Surprise | Gap, Inc. (The) Quote

Let’s see how things are shaping up prior to the earnings announcement.

Factors at Play

Gap remains committed toward its growth strategy, which mainly focuses on the Old Navy and Athleta brands. The company, which had reported growth in comparable-store sales (comps) in the preceding four quarters owing to Old Navy’s robust performance, is likely to continue the momentum in the fourth quarter.

Earlier, management had stated that comps reflected strength for the fiscal fourth quarter owing to persistent momentum at key areas of the company’s business. For fiscal 2017, comps are anticipated to grow in low-single digits versus previous projection of flat to marginal improvement.

Moreover, comps performance buoyed Gap’s top line, delivering fourth straight beat in the fiscal third quarter. Encouragingly, analysts polled by Zacks expect revenues of $4,667 million in the quarter under review, up nearly 5.4% year over year. Markedly, the consensus estimates for the Old Navy, Gap and Banana Republic brands are pegged at $2,118 million, $1,610 million and $713 million, respectively, representing year-over-year increases of 20.5%, 21.8% and 28%.

Also, Gap’s solid strategic efforts are well reflected in the company’s share price movement. In a year’s time, the stock surged 31% substantially outperforming the industry’s gain of 1.5%.

Furthermore, Gap continues to focus on boosting its digital and mobile offerings, omni-channel capabilities as well as enhancing its footprint in the value and active space. Backed by these initiatives and a sturdy performance in the nine months of fiscal 2017, management raised outlook for the year as well. For fiscal 2017, Gap envisions adjusted earnings per share in the range of $2.08-$2.12, up from $2.02-$2.10 projected earlier.

However, Gap’s significant international presence exposes it to adverse currency fluctuations, which might adversely impact the company’s top and bottom lines. In the third-quarter, currency headwinds impacted the bottom-line growth by nearly 3 percentage points.  

What the Zacks Model Unveils

Our proven model shows that Gap is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Gap has an Earnings ESP of -0.08%. The company carries a Zacks Rank #2, which increases the predictive power of ESP. However, its negative ESP makes surprise prediction difficult.

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:

Best Buy Co., Inc. (BBY - Free Report) has an Earnings ESP of +5.16% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Dollar General Corporation (DG - Free Report) has an Earnings ESP of +2.20% and a Zacks Rank of 2.

Macy's, Inc. (M - Free Report) has an Earnings ESP of +0.92% and a Zacks Rank #2.

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