Gap (GPS) was falling on Friday morning after its March sales disappointed, and Janney Montgomery Scott cut the apparel retailer to Hold.
Gap reported March global same store sales slid 6%, while analysts were looking for a 1.1% increase. For its individual brands, Gap was down 7% versus flat last year, Banana Republic fell 4% versus positive 1% last year and Old Navy dropped 7% versus a 2% fall last year.
Janney's Adrienne Tennant downgraded the stock to Neutral after the report, basing her decision on four main points: inventory that is growing faster than sales (creating margin pressure), deeper year-over-year promotions (indicating a competitive landscape), margin and comp pressures due to off-target Gap division product, and earnings per share growth that is reliant on selling, general and administrative control and share repurchases to offset gross margin pressures. Along with the downgrade, she lowered her fair value estimate for the stock from $50 to $41.
From the note:
We are lowering our first half estimates; 1Q14 goes to $0.55 from $0.67 (versus consensus of $0.67) and 2Q14 goes to $0.60 from $0.70 (versus consensus of $0.69). The company expects gross margin for 1Q14 to be below the prior year by more than the year-over-year decline in 4Q13 (280 basis points). In addition, given the company's ongoing expense management, the company expects 1Q14 operating expenses to be flat to last year. We expect the company to provide explicit 1Q14 EPS guidance with the company's April sales release. There are three main reasons impacting 1Q14 results: 1) severe storms that lead to store closures in the month of February, 2) heavier levels of inventory going into 1Q14, and 3) negative traffic trends in March. In addition, the company noted the Gap brand is seeing the greatest amount of pressure. Based on our March channel checks, we noted "deeper" promotional activity year-over-year across all three divisions for the majority of the month signifying the need to move through excess inventories. The company also noted that due to the shifting of the Easter holiday in 2014, March results were negatively impacted and therefore the months of March and April should be looked at together. Despite lowering 1Q14, the company reaffirmed FY14 EPS guidance range of $2.90 to $2.95 (the Street is currently at $2.96). This guidance range includes a negative impact of 5 percentage points from weakening foreign currencies. At its midpoint, the company's FY14 guidance represents an EPS growth of 7% on a reported basis. Excluding this impact, the company expects EPS growth to be in the double digits. We expect the retail environment to remain challenging in 1H14, pressuring merchandise margins, and believe SG&A control, margin-driving initiatives, and ongoing buyback activity are necessary to help support EPS.
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