TLDR; Gap (GPS) reports Q4 earnings on March 7th. I think they’re going to fall short on expectations and guide lower on gross profit margin. Expectations are high, but the steep discounts suggest a revenue miss. GPS hired a high fashion guy to make changes. I have doubts those changes will work. It’ll turn off the existing customer and Temu is making it difficult to acquire new apparel customers.
The price has run up from less than $8 last summer. With a $1 EPS estimated for the next 12 months, the forward PE is about 20. Ralph Lauren and Tapestry have recently reported good earnings; however it was driven by international sales. GPS had a big Q3 that sent the stock up 50%. Strong Gap results are priced in.
Here’s what the stock analysts at CFRA have to say with a price target of $12, down from the current $19.75 share price. Gap nailed the athleisure trend with Athleta, but now they’ve got tough year over year comparables.
“Our Sell opinion and price target reflect our view that GPS is in a transition period as it continues to close stores of its less profitable brands (Gap and Banana Republic) while seeing a slowdown at Athleta. We expect this transition to continue to weigh on earnings and revenues in the near term. We see potential in the company’s Athleta brand even after revenue growth deceleration in recent quarters and believe the brand is well positioned in the athleisure space. We expect continued promotional activity to plague margins and would steer clear of shares of GPS in the near term while a shakeup in leadership causes more uncertainty surrounding shares.”
Gap hired Zac Posen two weeks ago as creative director of GAP and Old Navy. His background is in high fashion and judge on project runway. He does not have a track record of profitably selling mass market clothes.
“Posen isn’t the first person to come to mind in this regard. His eponymous brand, which he launched in 2002 when he was in his twenties, shuttered in 2019. The following year, the “Zac Posen” name and IP were sold to the licensing firm Centric Brands. In 2014, Posen was appointed the creative director for womenswear at Brooks Brothers and served in that role until the company filed for bankruptcy in 2020.”
https://www.fastcompany.com/91024027/gap-inc-hires-zac-posen-as-its-new-creative-director-hes-a-surprising-pick
I suspect Posen plans to make merchandising changes. The [clearance sections](https://www.gap.com/browse/category.do?cid=65289&nav=hamnav%3AMen%3ACategories%3ASale#pageId=0&department=75) at GAP have an extra 50% off plus another 20% with the promo code TREAT. That’s a signal that they are dumping inventory at a loss, either because they want to rebrand, they missed their revenue estimates, or both. It’s not just the quantity of items with a steep discount. It’s the full assortment of sizes and colors on quality merchandise. Part of the large recent share price increase was driven by getting inventory levels under control. If they went into Q4 with a desirable level of inventory, why did they come out of Q4 needing to slash prices?
Old Navy is supposed to be their profit center. The women’s [clearance section](https://oldnavy.gap.com/browse/category.do?cid=96964&nav=hamnav%3AWomen%3ADeals%3AClearance#department=136) has 1990 item deeply discounted with an additional 30% off. My theory is they missed revenue estimates and are dumping inventory to shift merchandising strategy. They’ll pull forward demand selling at a low gross profit margin to their current customer. Then their customer will go through a period where they won’t make any full price purchases. At the same time, they’ll launch their newly designed Posen product. The current customer liked their old product. That’s why they were a customer. GPS will have to acquire new customers.
Temu and Shein are taking market share. It’s getting harder to digitally acquire customers as the Chinese companies bid up marketing costs. They now generate [10% of Facebook’s revenue.](https://www.reuters.com/breakingviews/temu-is-spending-like-billionaire-2024-02-12/)
