Gap: Color on Quarter
--> GPS ~unchanged premarket after initially rallying ~5% in the after hours on the restructuring news
- Stifel downgrades GPS to Hold from Buy. While co remains a well-controlled and well-managed business, the merchandising challenges facing all divisions continues to compromise results. Mgmt also announced an aggressive cost-cutting and business rationalization plan that will reduce expenses and improve profitability by closing under-performing stores. While firm applauds the move, firm recognizes that this does nothing to improve the appeal or LT success of the various Gap brands. While the shares appear inexpensive, (P/E of 8x is a discount to the company's two-year average of the out-year multiple for the co of 12x) without visibility for improvement in the fundamentals, they are challenged to recommended the shares.
- Mizuho cuts tgt to $17 from $18 on lower estimates. They believe fashion woes amidst traffic headwinds will continue to plague all three core brands. While they remain impressed by managements' ability to cut costs, they lack visibility on the timing of competitively priced, well designed assortments. Until such performance is visible, they expect the stock to trade at a discounted multiple to the group. While they expect shares to move higher to the $18-19 range on the expectation of $275mm in expense savings, they believe weak May comps could shine light on soft topline and overall fundamentals.
- TAG cuts tgt to $21 from $23. Earnings visibility remains challenged, as evidenced by management's withdrawal of annual guidance. They believe that promotional pressure could continue, particularly at ON and BR as the co works to improve the offerings at those brands. The actions to reduce capex and cut costs help to shore up cash flow and support margins, but the stock will likely require sustained improvement in comps across the brand portfolio to regain traction from current levels. They see upcoming catalysts as limited at this point now that the Spring season has disappointed.
- FBR & Co cuts tgt to $22 from $27. While they view the changes as a positive, we believe a turnaround could be further out given time needed to regain the consumer and a highly competitive environment. With the recent changes, they remain on the sidelines and look for comp stabilization, increased international visibility, inflection at BR, a return to positive comps at ON, or a more attractive entry point.
- Wedbush raises tgt to $20 from $19. Cost cuts improve EPS outlook for 2017, but fundamentals of the co's core businesses remain under pressure. 1Q's incremental information was largely centered on meaningful cost cuts, from a combination of closing doors internationally and corporate level cost saves. This shores up the outlook for 2017 EPS. However, it does not address ongoing challenges across all three of the company's core brands. They see limited opportunity for a quick fix at any of the three divisions, and believe 2016 EPS remain at risk.
- Topeka notes that, while GPS has made progress in product efforts, particularly at Gap brand, an uncertain and volatile environment and other issues such as over-assortment, lack of key item depth and marketing, have hampered brand performance at Old Navy and Banana, leading to a tougher 2016. They believe GPS remains very disciplined on expenses and inventory, and that mgmt has a clear sense of urgency as it looks to turn things around. Given the tougher retail environment, they remain on the sidelines, looking for more visibility on 2H16.