Shares of Gap (GPS) are on the rise after the company said during its earnings conference call that it is considering closing hundreds of underperforming namesake stores as sales at the Gap brand continue to decrease. The company reported flat comparable sales in the third quarter, as gains at Banana Republic and Old Navy were offset by the decline in the Gap brand. Commenting on the company’s quarterly results, Jefferies analyst Randal Konik recommended buying Gap’s shares given its improved strategic direction and his estimate of 100% upside.
QUARTERLY RESULTS: Last night, Gap reported third quarter earnings per share of 69c and $4.1B, with consensus at 68c and $4B. For the third quarter, comparable sales at Old Navy Global were positive 4%, Gap Global were negative 7%, and Banana Republic Global were positive 2%. Additionally, Gap narrowed its FY18 earnings per share view to $2.55-$2.60 from $2.55-$2.70, and backed its FY18 same-store sales view of flat to up slightly. The company now expects capital spending to be approximately $750M for fiscal year 2018 compared with previous guidance of about $800M, with a continued focus on transformative infrastructure investments to support its omni-channel and digital strategies, such as information technology and supply chain.
STORE CLOSURES: During the company’s earnings call, Gap said it is exploring closing hundreds of underperforming stores at its namesake brand. Noting that the retailer still has almost 800 Gap-branded stores globally, CEO Art Peck said he was reviewing some flagship locations as well as “hundreds of other stores” based on profits, traffic trends and customer experience. “There are hundreds of other stores that likely don’t fit our vision for the future of Gap brand specialty store, whether in terms of profitability, customer experience, traffic trends, importantly the ROD structure and/or near and long-term relevance to the brand. These stores are a drag on the health and a drag on the performance of the brand. […] There likely will be a cash cost to exit many of these stores, which we will attempt to minimize with appropriate sequencing. But I plan to exit those that do not fit the future vision quickly,” Peck said.
JEFFERIES SEES 100% UPSIDE: In a research note this morning, Jefferies analyst Randal Konik told investors that the third quarter results showed that Old Navy is “a machine,” Athleta is a major long-term growth vehicle, Banana Republic is in “great” cyclical shape, and the Gap brand’s footprint issues are being addressed aggressively. Further, the analyst expected significant closures within the Gap brand fleet, which should uncover the portfolio’s “hidden jewels.” Given the improved strategic direction, Konik recommended buying shares of Gap with his sum-of-the-parts analysis yielding 100% upside. The analyst reiterated a Buy rating and $50 price target on Gap shares.
PRICE ACTION: In morning trading, shares of Gap have gained about 4% to $25.59.