RBC On Gap: Too Soon To Call A Bottom

RBC Capital Markets analysts Brian Tunick and Kate Fitzsimons said Gap Inc (NYSE: GPS) shares dropped more than 12 percent as traffic volatility has kept the issue "on defense."

While the analyst said it is too soon to call a bottom, the brokerage maintains its Sector Perform rating, with a reduced price target of $20. The comments come on the back of the company reporting significantly lower-than-expected comparable store sales for April.

Furthermore, the analysts lowered estimations after Gap reported -7 percent in comparable store sales in April and guided EPS in the range of $0.31–$0.32. Both reported figures and guidance were short of the Street's expectations, with the consensus calling for comps of 1.1 percent growth and EPS of $0.44.

Related Link: Gap's April Sales Were More Painful Than Expected

Tunick and Fitzsimons said, "While a pending restructuring suggests a slight margin buffer, it's too soon to call a bottom as North American traffic volatility creates an ongoing need to clear inventory on top of GPS's est. 8 percent EBIT margins vs. peers 4–5 percent."

Key Takeaways

Tunik listed some of the key takeaways after Gap's April sales number failed to meet expectations. He said that there was traffic weakness throughout the industry that started in late March and continued into April, and there was no update to LSD inventory forecast, which indicated that the outlook remained intact. However, if traffic remained –HSDs, he said, "[W]e're likely entering 2Q16 too heavy."

The brokerage said, "Efforts to reengineer the product at an appropriate price are underway, with progress by fall. Following 1Q setback, restructuring detail to come on May 19 CC. With spring 2016 originally touted as the 'no excuses' turn, the $0.31–$0.32 1Q16 EPS guide suggests ~465-bps of EBIT margin drop vs. 235-bps of pressure in 4Q16."

The analyst added, "Calling out a weaker apparel backdrop, management intends to discuss profit-shoring initiatives during its 5/19 CC, including opportunities to streamline its operating model – i.e. centralizing some currently decentralized brand functions – and evaluating Banana Republic and Old Navy fleets outside of North America (primarily Europe and Japan)."

Shortly before Tuesday's regular session close, the stock was trading down 12.4 percent at $19.10.