Financial Performance

Gap Shares Rise 4% on Turnaround Optimism

The retailer says its second-quarter results show "underlying signs of progress," including improved merchandise margins.
Matthew HellerAugust 19, 2016

Gap Inc.’s sales fell less than expected in the second quarter and earnings also beat estimates, fueling investor optimism that the retailer may be moving toward a profitable turnaround.

Gap shares rose nearly 4%, to $26.89, in trading Friday even though the company revised its outlook downward, predicting it would earn between $1.87 and $1.92 this year, down from its previous range of $2.20 to $2.25 and below the $1.96 consensus estimate.

Late Thursday, Gap said it earned 60 cents a share on revenue that fell 1.2% to $3.85 billion. Same-store sales fell 2% over the year-ago period but improved on the 5% drop in the first quarter.

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Analysts were expecting Gap to earn 59 cents a share on revenue of $3.78 billion. “During the quarter, we took critical steps to execute our restructuring plans and to build a more efficient global brand model with greater potential growth,” CEO Art Peck said in a news release.

“While I remain unsatisfied with the pace of improvement across the business, I am encouraged by the underlying signs of progress in Q2, as demonstrated by healthier merchandise margins,” he added.

Amid a prolonged sales slump, The Wall Street Journal reported, Gap “has been trying to turn itself around by shutting some stores, shaking up its management ranks and revamping its merchandise to compete better with fast- fashion chains like Hennes & Mauritz AB.”

As part of a plan to save $275 million a year, it is closing all its Old Navy stores in Japan and some Banana Republics mostly outside of North America by the end of its business year.

In an earnings call, CFO Sabrina Simmons said merchandise margins increased 20 basis points year-over-year in the second quarter and 90 basis points on a constant-currency basis.

“Gap’s Q2 really isn’t that bad for the apparel space at the moment, particularly given its mall exposure,” Seeking Alpha commented. “-2% comps and flat merchandise margins aren’t going to send investors flocking to a stock, but on a relative basis, those numbers aren’t terrible.”