Gap Lowers Earnings Forecast

Department store chain The Gap Inc. (Ticker Symbol: GPS) reported quarterly results this week that beat the street’s expectations. The San Francisco, California-based company reported an earnings per share beat of .53 cents vs. Wall Street analysts’ expectations of .51 cents per share.  Additionally, the company reported a slight revenue beat of $4.00 billion vs. $3.96 billion that Wall Street analysts’ were expecting. 

The Gap also reported that domestic same-store sales were down 4% vs. Wall Street analysts’ estimates of a decline of 2.3%. Gap owns multiple brands including the Banana Republic and Old Navy.  Old Navy had a disappointing quarter and saw same-store sales drop 4%. Additionally, Banana Republic saw same-store sales drop 3%, while Gap saw its global same-store sales decline 7%.

Gap also lowered its earnings per share forecast for its fiscal year to a range between $1.70 and $1.75 compared to Wall Street analysts’ expectations of earnings of $1.83 per share. The company is also forecasting that its same-store sales for the fiscal year will be down to mid-single digits vs. the previous forecast of low single digits.  

The above image is a chart of Gap’s stock over roughly the past eight years. The stock started off in 2012 steadily climbing higher and continued to trend up for roughly 18 more months.  The Gap found some resistance around the $46.00 level while trading in a horizontal channel, which some stocks do after large moves. Horizontal channels are areas of indecisiveness between buyers and sellers and the stock is a point at which supply and demand are relatively balanced. 

Some traders use what’s called a “measured move” to try and project where the stock might go in the future based on breakouts from technical formations. In Gap’s case, one would take the price from the top of the channel (roughly $46.00) and the price from the bottom of the channel (roughly $36.00) then subtract them to get the difference ($10). The difference is then projected from the breakout point in the direction of the breakout to project the price of the measured move (the bottom line from the channel – Difference = Measured Move). In Gap’s case, the projected price target from the horizontal channel was $26.00, which the stock achieved roughly four months after breaking out.  

The stock proceeded to trade lower eventually finding some price support below the $20.00 level while forming a bullish divergence where the stock makes and lower low in price but the Relative Strength Index makes a higher low. Since then, the stock has continued to trade sideways and has gone nowhere fast.  The stock is currently negative for the year and is trading below all its 100- and 200-day moving averages.

(Chart above courtesy of ​www.tipranks.com​)  

Based on a survey of 18 analysts offering 12-month price targets, the average price target for Gap’s stock is $17.38. According to that number, the stock is priced at a slight discount relative to Wall Street analysts and could be considered undervalued around current levels near $16.72.

Investors in the company should look to Gap’s next earnings release on March 1st for fresh news within the business.

 


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