Shares of clothing retailer Gap (NYSE:GPS) jumped in Thursday’s after-hours following its Q2 financial results. Gap’s comparable sales or comps and overall revenues continued to decline. However, its revenues came ahead of the consensus estimate, while the rate of decline in comps moderated sequentially. Further, management’s efforts to stabilize the business and accelerate growth impressed investors.
Gap’s Q2 in Brief
Gap delivered net sales of $3.86 billion, which declined 8% year-over-year. However, it came ahead of the Street’s estimate of $3.82 billion. Its comps fell 10% as inventory issues and macro headwinds impacting consumer spending remained a drag. However, it compared favorably to a 14% decline in Q1.
Gap’s online sales fell 6% year-over-year. However, the pace of decline slowed in Q2 compared to the previous quarter. Notably, Gap’s online sales decreased by 17% in Q1.
Lower sales, higher discounts to clear inventory, and higher freight and commodity costs took a toll on its profitability. Gap delivered adjusted earnings of $0.08 per share in Q2 compared to an adjusted EPS of $0.70 in the prior-year period.
Citing macro uncertainty and execution challenges, Gap withdrew its prior FY22 outlook. However, management stated that it witnessed an improvement in sales trends in July, and the momentum continued in August. Also, the company is taking measures to right-size its inventory and aggressively cut overhead costs, which is positive. Further, it expects air freight expenses to decline in the second half of FY22.
Management’s initiatives to support profitability and balance assortments were cheered by market participants. Following management’s commentary, GPS stock was up about 8% in the after-hours of trade.
Is Gap a Buy or Sell?
Wall Street analysts are skeptical about Gap’s prospects. Gap stock has received one Buy, nine Hold, and six Sell recommendations for a Moderate Sell rating consensus. Further, analysts’ average price target of $8.97 implies 10.4% downside potential.
Gap stock is down about 42% year-to-date. Hedge fund managers have accumulated GPS stock on the dip. According to TipRanks’ Hedge Fund Trading Activity tool, hedge funds bought 5.6M GPS stock last quarter. Overall, Gap has a Neutral Smart Score of 7 out of 10.
Bottom Line: Macro Headwinds to Impact Gap
Macro headwinds and uncertainty could continue to hurt consumer spending, in turn affecting Gap’s financials in the short term. However, the company’s efforts to right-size inventory, rebalance assortments, focus on reducing costs, and fortify the balance sheet augur well for future growth.
