Gap Shares Tumble on Bigger Than Expected Same Store Sales Drop

Shares of clothing retailer Gap Inc. were in the red on Friday after the company reported second quarter earnings.

Excluding items, Gap reported earnings per share of 76 cents, beating the 72 cents that analysts had expected. Net sales saw a jump of 7.5% to $4.09 billion, while analysts waited for $4.01 billion.

Sales at Gap brand stores that were opened for over a year saw a 5% drop, which was more than the 2.55% drop that analysts expected.

Old Navy saw same-store sales rise 5 percent, while analysts had expected just 4.5 percent growth.

Nomura analyst Simeon Siegel reiterated a “neutral” rating on the stock with a $32 price target. Credit Suisse analyst Michael Binetti as well as Baird analyst Mark Altschwager also maintained a “neutral” rating with a $33 and $35 price target, respectively.

Morgan Stanley analyst Kimberly Greenberger maintained an “underweight” rating with a $25 price target.

Simeon Siegel remarked, “Old Navy continued its path of consistency and [Banana Republic] is a positive, but Gap brand continues to lag and is sitting on a second quarter of excess product. And although it was not stated explicitly, we wonder about a likely deceleration at Athleta, with [management] calling out swim weakness and other revenue growth dropping meaningfully.”

Credit Suisse’s Binetti said, “We see little reason for multiple expansion until GPS can take some pressure off Old Navy to consistently deliver on corporate EPS targets.”

According to Morgan Stanley’s Greenberger, the company’s beat in the second quarter looks fine in isolation, but given how the overall sector performed in the quarter, the “margin profile looks underwhelming.”

“Obviously, we’re not pleased with this performance,” said Chief Financial Officer Teri List-Stoll. “It reflects the conscious choice to prioritize margin dollars over comp growth as we continue to move through the inventory issues in the brand.”

Neil Saunders, managing director of GlobalData Retail, said on Thursday, “t discourages people from visiting and purchasing … It means Gap struggles to charge full price and has to resort to continuous discounting to try and stimulate sales.”

Disclaimer: We have no position in Gap Inc. (NYSE: GPS) and have not been compensated for this article.