Gap Shares Soar After Earnings Blow Past Estimates

The San Francisco, California-based apparel retailer Gap reported better-than-expected earnings and revenue in the fourth quarter, sending its shares up over 12% on Friday.

The U.S. specialty apparel retailer reported a quarterly adjusted loss of 2 cents per share, better than the Wall Street consensus estimates for a loss of 18 cents per share. The company’s revenue rose more than 2% to $4.5 billion from a year earlier. That too topped the market expectations of $4.49 billion.

The company expects adjusted earnings per share to range from $1.85 to $2.05 in fiscal 2022, compared with last year’s $1.44 and analysts’ expectations of $1.86. Gap forecasts net sales to decline in the mid-and high-digits, compared with estimates of a 3.8% decline, Reuters reported.

At the time of writing, Gap stock traded 12% higher at $16.12 on Friday. The stock fell more than 19% so far this year after falling over 12% in 2021.

Analyst Comments

“No-moat Gap met our forecast of a small operating profit in2021’s fourth quarter despite a gross margin of just 33.7%, down 400 basis points from last year. The firm, as previously warned, chose to use expensive air freight to overcome shipping problems and meet holiday demand, but it was able to offset some of the incremental cost by controlling other expenses,” noted David Swartz, Equity Analyst at Morningstar.

“Looking ahead, Gap’s 2022 guidance for low-single-digit sales growth, an adjusted operating margin of 6%-6.5%, and adjusted EPS of $1.85-$2.05 is in line with our forecast despite shipping issues continuing in the first half of the year and input inflation. We expect to lift our $26.50 per share fair value estimate by about 5% given this outlook and rescission of our prior expectation of a higher U.S. corporate tax rate, leaving Gap’s shares as very undervalued.”

Gap Stock Price Forecast

Eleven analysts who offered stock ratings for Gap in the last three months forecast the average price in 12 months of $19.45 with a high forecast of $26.00 and a low forecast of $14.00.

The average price target represents a 23.49% change from the last price of $15.75. Of those 11 analysts, three rated “Buy”, six rated “Hold”, while two rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price to $14 with a high of $34 under a bull scenario and $5 under the worst-case scenario. The investment bank gave an “Underweight” rating on the apparel retail company’s stock.

“The 4Q beat & above-consensus ’22 outlook lifted shares +9% AMC. But ’22 guidance appears optimistic against ON mis-execution, ongoing freight headwinds, operating cost inflation, & y/y merch margin giveback risk. As such, we model ’22 EPS ~70% below the mid-point of guidance. Stay UW with $14 PT,” noted Kimberly Greenberger, equity analyst at Morgan Stanley.

GPS is in need of significant transformation. The separation work & Covid were the catalysts it needed to downsize, as reflected by plans outlined at the ’20 Investor Day. We like new mgmt’s commitment to fleet & corporate downsizing, but are less confident in their ability to execute following 3Q21’s mis-execution. We worry about both the SG&A & GM trajectory post-2021. GM gains likely reverse, & it is unclear if higher marketing spend will yield sales re-acceleration. Our fundamental concerns remain: falling store traffic, eComm disintermediation, declining brand health, apparel price deflation, falling margins. A portion of GPS’ portfolio is less competitive (Gap & BR).”

Several analysts have also updated their stock outlook. BMO cut the price objective to $16 from $19. Credit Suisse lowered the target price to $16 from $20. JPMorgan raised the price target to $20 from $17. Jefferies slashed the price target to $18 from $23.

However, technical analysis suggests it is good to sell for now as 100-day Moving Average and 100-200-day MACD Oscillator gives a strong selling opportunity.

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