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Gap Plunges 12% As Marketing Expenses Drag Down 3Q Earnings
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Gap Plunges 12% As Marketing Expenses Drag Down 3Q Earnings

Shares of apparel retailer Gap tanked 11.6% in pre-market trading on Wednesday as the company missed analysts’ earnings expectations due to higher marketing costs.

Gap’s (GPS) 3Q FY20 (ended Oct. 31) EPS declined 32.4% year-over-year to $0.25, missing analysts’ forecast of $0.32. Earnings declined as the company ramped up its marketing efforts across all of its brands in the third quarter to improve its market share.

Sales were flat at $3.99 billion, compared to the prior-year quarter, but exceeded the Street’s consensus estimate of $3.82 billion. Gap’s online sales soared 61% and accounted for 40% of overall sales. However, weak store sales pulled down the overall top line. Sales for the company’s Old Navy and Athleta brands increased 15% and 35%, respectively. However, sales for Gap and Banana Republic brands declined 14% and 34%, respectively, in 3Q. (See GPS stock analysis on TipRanks)

As for the 4Q outlook, Gap expects net sales to be “equal to or slightly higher” year-over-year. The company also estimates its 4Q gross margin rate will be equal to the prior-year quarter as continued benefits of store closures would largely be offset by higher shipping expenses. It predicts operating expenses to be between 33%-34% of sales, reflecting continued brand marketing investments and costs related to in-store health and safety measures.

Guggenheim analyst Robert Drbul reiterated a Hold rating on Gap after the results. Commenting on Gap’s prospects, Drbul said “While we believe there are attractive characteristics to be found in GPS’ Athleta and Old Navy brands (higher margin and growth profiles), we continue to believe there is significant uncertainty around the company’s revenue and earnings trajectory given its largely mall-based store fleet. We anticipate significant mall store closures and traffic challenges in coming periods.”

The rest of the Street has a cautiously optimistic outlook on Gap, with 4 Buys versus 11 Holds. Shares have surged 52.1% year-to-date, as of Nov. 24. The average price target of $22.40 indicates a downside potential of 16.6% from current levels.

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