Several firms comment on Gap (NYSE:GPS) after the retailer announced its quarterly results last night and provided updated outlook for the year:
- Banc of America notes GPS maintained their back half estimates after flowing through Q2 EPS, and raised the full- year to $0.90-0.95. Firm expects SG&A to be a major area of opportunity in the
second half, with savings coming from significant headcount reductions (roughly $100M) as well as cutting back on incremental marketing that they ran last Fall. Together these could provide as much as $0.09-0.10 of cushion to the back half.
Inventories came in at down (6)% per square foot, ahead of the plan for down low single digit, and are now expected to be down mid-single digit at the end of Q3 and Q4. Merchandise margins also showed some signs of improvement and were up +170 bps in Q2, and improved at each of the divisions. They fully recognize that its too early to call a turn at this point, but more consistency on this line is certainly encouraging, with easier compares in the second half.
BAC continues to see significant EPS potential in a turnaround scenario and limited downside with numbers stabilizing and the stock trading at just 6.9x trailing EBITDA and just 13.9x '08E P/E ex. cash. As a result, they are sticking with their Buy rating at this time. Tgt is $25.
- Deutsche Bank maintains their Buy rating and $22 tgt saying raising guidance makes GPS a standout considering that most other apparel retailers have been lowering guidance. In addition to milestones that include the first Y-O-Y EPS increase in nearly 3 years, significant gross margin improvement, and SG&A leverage despite a negative comp, GPS’ multiple should get credit for the fact that the company is raising guidance while most of the peers are reducing. Raising: Q3 C07 to $0.20 from $0.18, Q4 C07 to $0.28 from $0.27, C07 to $0.93 from $0.89, C08 to $1.05 from $0.94.
Deutsche believes GPS has limited downside and substantial upside potential, making the risk-reward attractive, particularly compared to decelerating performance for much of the peer group.
- Citigroup says GPS posted solid 2Q07 and raised guidance, but they think EPS can go higher.
2Q07's inventory PSF at -6% was better than an expected -LSD, a bullish signal for 3Q07 merchandise margin, although we conservatively estimate flat 3Q GM. Further, the firm applauds the -MSD 2H07 inventory guidance.
Stabilizing margins on strong inventory control and cost reductions yield improving free cash flow (yield +4-5%) and share repo's (new $1.5bil authz'n). New leadership (CEO & brand Presidents) should positively impact customer focus, store experience and merchandise execution. A potential merchandising turnaround would yield further upside to firm's above consensus estimates.
Notablecalls: Solid results from GPS. No question about it. I was surprised by the gross margin performance and based on comments provided by Glenn Murphy (the new CEO) I think there will be upside to current EPS guidance. New CEO's rarely want to be overly optimistic with guidance.
I think GPS can move above the $18 level today.
- Banc of America notes GPS maintained their back half estimates after flowing through Q2 EPS, and raised the full- year to $0.90-0.95. Firm expects SG&A to be a major area of opportunity in the
second half, with savings coming from significant headcount reductions (roughly $100M) as well as cutting back on incremental marketing that they ran last Fall. Together these could provide as much as $0.09-0.10 of cushion to the back half.
Inventories came in at down (6)% per square foot, ahead of the plan for down low single digit, and are now expected to be down mid-single digit at the end of Q3 and Q4. Merchandise margins also showed some signs of improvement and were up +170 bps in Q2, and improved at each of the divisions. They fully recognize that its too early to call a turn at this point, but more consistency on this line is certainly encouraging, with easier compares in the second half.
BAC continues to see significant EPS potential in a turnaround scenario and limited downside with numbers stabilizing and the stock trading at just 6.9x trailing EBITDA and just 13.9x '08E P/E ex. cash. As a result, they are sticking with their Buy rating at this time. Tgt is $25.
- Deutsche Bank maintains their Buy rating and $22 tgt saying raising guidance makes GPS a standout considering that most other apparel retailers have been lowering guidance. In addition to milestones that include the first Y-O-Y EPS increase in nearly 3 years, significant gross margin improvement, and SG&A leverage despite a negative comp, GPS’ multiple should get credit for the fact that the company is raising guidance while most of the peers are reducing. Raising: Q3 C07 to $0.20 from $0.18, Q4 C07 to $0.28 from $0.27, C07 to $0.93 from $0.89, C08 to $1.05 from $0.94.
Deutsche believes GPS has limited downside and substantial upside potential, making the risk-reward attractive, particularly compared to decelerating performance for much of the peer group.
- Citigroup says GPS posted solid 2Q07 and raised guidance, but they think EPS can go higher.
2Q07's inventory PSF at -6% was better than an expected -LSD, a bullish signal for 3Q07 merchandise margin, although we conservatively estimate flat 3Q GM. Further, the firm applauds the -MSD 2H07 inventory guidance.
Stabilizing margins on strong inventory control and cost reductions yield improving free cash flow (yield +4-5%) and share repo's (new $1.5bil authz'n). New leadership (CEO & brand Presidents) should positively impact customer focus, store experience and merchandise execution. A potential merchandising turnaround would yield further upside to firm's above consensus estimates.
Notablecalls: Solid results from GPS. No question about it. I was surprised by the gross margin performance and based on comments provided by Glenn Murphy (the new CEO) I think there will be upside to current EPS guidance. New CEO's rarely want to be overly optimistic with guidance.
I think GPS can move above the $18 level today.
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