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Will Gap's (GPS) Strategic Actions Drive Earnings in Q1?

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The Gap, Inc. (GPS - Free Report) is slated to report first-quarter fiscal 2018 results on May 24. The company has delivered a positive earnings surprise in each of the trailing four quarters, with an average of 11.1%.

The Zacks Consensus Estimate for first-quarter earnings is pegged at 45 cents, mirroring a year-over-year improvement of 25%. However, the estimate has moved down by a penny in the last seven days.

The Gap, Inc. Price, Consensus and EPS Surprise


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

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

What You Should Know

Gap remains committed toward its growth strategy, which mainly focuses on the Old Navy and Athleta brands. Management expects net sales of more than $10 billion and $1 billion, respectively, at each of the brands over the next few years, with these gains coming as a result of U.S. store expansion and mobile and e-commerce growth. Also, the company’s comps have been benefiting from robust Old Navy performance fueled by strength in category and improved traffic since the past few quarters.

In addition, the company’s solid focus on enhancing product quality and responsiveness to changing consumer trends bode well. Also, Gap’s endeavors to enhance the e-commerce and omni-channel capabilities by adopting a number of initiatives are commendable. Notably, the company has increased online presence across all of its brands. This, in turn, has made Gap’s online division the most profitable one, posting double-digit sales growth. In the fiscal first quarter, these factors are likely to add value to the company’s top-line growth and profitability.

Notably, analysts surveyed by Zacks expect sales of $3.61 billion, up nearly 5% from the year-ago period. For Old Navy brand, the consensus estimate for sales is pegged at $1,634 million, up 4.6% year over year.

However, Gap’s significant international presence exposes it to adverse currency fluctuations, which might adversely impact the company’s top and bottom line. In fourth-quarter fiscal 2017, currency dented earnings per share growth by about 2 cents per share. Also, currency woes along with stiff industry completion and other macroeconomic headwinds remain threats.

Softness across the company’s namesake and Banana Republic brands also remains a concern. Notably, for the sales at Gap and Banana Republic brands the consensus mark is pegged at $1,152 million and $514 million, respectively, reflecting a year-over-year decline of about 1% for both brands.

Given this backdrop, let’s wait and see what lies ahead of Gap in first-quarter fiscal 2018.

Zacks Model

Our proven model does not show 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 -6.06% and a Zacks Rank #4 (Sell), which makes surprise prediction impossible.

As it is we caution against stocks with Zacks Ranks #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing a negative estimate revision.

Stocks Likely to Beat Earnings

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:

Urban Outfitters, Inc. (URBN - Free Report) has an Earnings ESP of +2.52% and a Zacks Rank #2. 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 +1.38% and a Zacks Rank of 2.

American Eagle Outfitters, Inc. (AEO - Free Report) has an Earnings ESP of +0.14% and a Zacks Rank #3.

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