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Why Gap Inc. Stock Sank Today

By Jeremy Bowman - May 31, 2019 at 4:41PM

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Shares of the retail apparel giant sold off after its earnings report badly missed the mark.

What happened

Shares of Gap Inc. (GPS -9.84%) slid today after the casual-apparel chain posted a broadly underwhelming first-quarter earnings report. Comparable sales at Gap brand stores were particularly weak, plunging 10%, while even Old Navy, the discount chain that's been the company's standout performer, saw comps edge off 1%. Revenue and adjusted earnings also both fell, and Gap finished the day down 9.6% as the stock approached a five-year low.

So what

CEO Art Peck didn't mince words, calling the quarter "extremely challenging."

A pile of blue jeans

Image source: Getty Images.

Revenue slipped 2% to $3.7 billion, missing estimates of $3.77 billion; comps at Banana Republic, the company's third major chain, also fell, by 3%. Companywide comps were down 4%. Fundamentals on the cost side continued to break down as well.

Gross margin was down 140 basis points to 36.3%, likely a reflection of the decline in comps, and adjusted operating margin dropped from 6.1% a year ago to just 3.5%. Earnings per share adjusted for a gain from the sale of a building were $0.24, below expectations for $0.32 and down from $0.42 a year ago.

Peck added, "We are not at all satisfied with our results," but expressed confidence in the company's plan to separate Old Navy and streamline the two separate businesses, which is expected to happen next year.

Now what

Gap has been sounding the alarm bells for several quarters now, especially at its namesake chain, where the company seems to have lost ground to fast-fashion rivals like H&M and Uniqlo. Gap announced a store-closing plan earlier this year, anticipating about 230 closures, and in the first quarter shuttered 15 Gap brand locations in North America.

Gap's full-year outlook was also discouraging, as the company now sees comparable sales falling by low single digits, down from a previous range of flat to up slightly. On the bottom line, it expects adjusted EPS of $2.05 to $2.15, compared to a previous forecast of $2.40 to $2.55.

Given the declining comps, eroding margins, and the headwinds the company is facing, it's not surprising to see the stock taking a hit today.

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