Retailers Continue to Underperform

Department store chain The Gap Inc. (Ticker Symbol: GPS) reported quarterly results this week that fell short of analysts’ expectations. The San Francisco, California-based company reported an earnings per share beat of .63 cents vs. Wall Street analysts’ expectations of .53 cents per share.  However, the company reported a slight revenue miss of $4.01 billion vs. $4.02 billion that Wall Street analysts’ were expecting. Additionally, domestic same-store sales were down 4% vs. Wall Street analysts’ estimates of a decline of 3.1%.

Gap owns multiple brands including Banana Republic and Old Navy.  Old Navy is usually the Gap’s strongest arm but had a lackluster quarter and saw same-store sales drop 5%. Additionally, Banana Republic saw same-store sales drop 3%, while The Gap saw its global same-store sales decline 7%. The Gap also lowered its earnings per share forecast for its fiscal year to a range between $1.88 and $2.08 which is down from the prior range of $2.04 to $2.14.

Above is a longer-term weekly chart if Gap’s stock over the past nine years. In 2011, the stock put in an Inverse Head and Shoulders Pattern. The pattern consists of a move lower creating a shoulder, followed by a short rally.  Then a new low is made creating the head also followed by a small rally. A lower move is then made forming the last shoulder that does not go lower than the head.  The pattern is confirmed when it breaks through the neckline of the two small shoulder rallies.  After breaking through that pattern, Gap’s stock took off and rallied over 75% before pausing and putting in a short-term bull flag consolidation pattern for the third and fourth quarters of 2012.  Gap’s stock broke out of that pattern and went on to rally an additional 25%.

The stock spent the next two-and-a-half years trading in a trading range between the prices of roughly $35.00 and $47.00.   While doing so, the stock began to top forming a bearish divergence pattern (as indicated on the chart by the purple circles), where the stock makes a higher high in price but the Relative Strength Index makes a lower high.  Traders and investors sometimes look at divergences for a possible pause within the current trend, which can, at times, lead to a reversal, as occurred in Gap’s case. The stock broke out of that range to the downside and proceeded to put in its first oversold condition in its weekly RSI in over six years in the fourth quarter of 2016.  The stock recovered over the next two years but has since come across hard times. Currently, the stock is trading near its lowest levels of the decade and is in need of a fundamental catalyst to help it move higher.

(Chart above courtesy of ​​)

Based on a survey of 16 analysts offering 12-month price targets, the average price target for Gap’s stock is $20.07. According to that number, the stock is priced at a discount relative to Wall Street analysts and could be considered undervalued around current levels near $15.96.

Gap joins Macy’s, Nordstrom, and Kohl’s on the list of lackluster earnings and revenue reports from the department store chains for the quarter.  Time will tell if they get a lift from the remaining two quarters of the year as fund managers look for underperforming sectors.

Investors in the space should look to Gap’s next earnings release on November 21st for fresh news within the company.