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Gap Laying off Staff, Dwindling Sales and Profit to Blame
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Gap Laying off Staff, Dwindling Sales and Profit to Blame

Story Highlights

Gap is cutting jobs amid declining sales and earnings. Management is focusing on aggressively reducing its overhead costs to remain afloat amid weak demand.

Beleaguered clothing retailer Gap (NYSE:GPS), which recently ended ties with Kanye West, is cutting 500 corporate jobs, the Wall Street Journal reported, citing people familiar with the matter. The move comes at a time when the company is taking steps to boost its sales, aggressively cut overhead costs, and optimize profitability. 

Gap announced earlier that it would start implementing its initiatives to reduce overhead investments, which included a pause on planned hiring and open positions. Gap stock closed 3.3% lower following the announcement. Meanwhile, it has declined by more than 60% in one year.

Not Everything Is Gloom and Doom for Gap

It’s worth mentioning that Gap reported net sales of $3.86 billion in the second quarter of Fiscal 2022, which fell 8% year-over-year. Management blamed slowing demand due to the inflationary pressure on consumer spending for this decline. Further, elevated unproductive inventory, cost headwinds, and higher discounting took a toll on its profitability. 

Gap reported an adjusted EPS of $0.08 per share in the second quarter, compared to $0.70 in the prior year. Given the challenges and macro uncertainty, Gap withdrew its full-year outlook. 

Undeniably, Gap is struggling to stay afloat. However, management indicated during the second quarter conference call that the company’s sales trends showed improvement. Further, it is taking initiatives to balance assortments, right-size inventory, and lower overhead costs. 

Another key takeaway is that management expects air freight costs to trend lower in the second half of Fiscal 2022. Notably, its merchandise margins were negatively impacted by 130 basis points during the second quarter due to the incremental air freight costs. 

Is Gap stock a Buy, Sell, or Hold?

While management’s initiatives to boost sales and profitability are positive, analysts prefer to remain on the sidelines. Gap stock commands a Hold consensus rating on TipRanks based on one Buy, 10 Hold, and four Sell recommendations. Further, GPS’ average price target of $9.40 implies upside potential of 2.1%. 

While the Street remains sidelined, hedge fund managers are using the weakness in Gap stock to increase their holdings. Hedge funds bought 5.7M GPS stock in the last three months. Overall, GPS has a Neutral Smart Score of 5 out of 10 on TipRanks. 

Bottom Line: Investors be Cautious

Macro headwinds impacting consumer spending could continue to hurt Gap’s financials, at least in the near term. Though the company is moving in the right direction to accelerate growth, support profitability, and strengthen its balance sheet, these measures will take time to show results, implying investors should be cautious before investing in GPS stock.

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