Gap, which owns a chain of clothing stores, has released disappointing quarterly earnings due to supply chain problems. Gap’s quarterly revenues declined to $ 3.94 billion from $ 3.99 billion last year, while market consensus expected the indicator to rise to $ 4.43 billion. Net loss in August-October was $ 152 million, or $ 0.40 per share, compared to net income of $ 95 million, or $ 0.25 per share, in the same period the previous year. It is noteworthy that the market expected the indicator to rise to $ 191 million. Adjusted profit after deducting debt restructuring costs amounted to $ 0.27 per share against market expectations of $ 0.5.
TIKR
GPS
PRICE
$18
TARGET PRICE
$21
UPSIDE
21%
The dynamics of sales of the company’s brands relative to the pre-pandemic year of 2019 was heterogeneous. Thus, Old Navy’s revenue increased by 8% yoy, Athleta jumped by 48%. At the same time, sales in Gap stores decreased by 10% yoy, in Banana Republic by 18%. Online sales of the company in the last quarter grew by 48% in two years, and their share in the total sales of the Gap was 38%. The report notes that the company faced supply problems in the third quarter, in particular due to factory closures due to the outbreak of COVID-19 in Vietnam, where about 30% of its production is produced. In addition, continued congestion in ports has also negatively impacted the on-time delivery of goods.
According to the company’s forecast, in 2021, net income per share will be $ 0.45-0.60. Losses in sales due to supply problems are estimated at about $ 550-600 million, expenses for air transportation of goods – at $ 450 million. Adjusted profit is expected to be in the range of $ 1.25-1.40 per share by the end of the year, however, market consensus estimates the year-end figure at a more optimistic level of $ 2.15 per share. We were disappointed with quarterly results, but we believe that next year, as the supply chain stabilizes, the company’s business will begin to receive tangible support. We like the quality of management in the company and the leadership of GAP in the market. The company is focused on protecting and increasing profits, returning funds to shareholders and creating a flexible supply chain. Increased sales in 2022 can be achieved through a focus on supply chain, mobile technology development and disciplined inventory management. We keep our valuation of the company at $ 21 per share.
GPS is also aware that this is a risk, and stated that it (1) canceled some 1H22 orders,(2) reflowed some inventory into later seasons, and (3) plans to pack and hold inventoryif goods arrive too late before holiday. We believe the uneven inventory flow may alsotest GPS’ brand momentum as GPS’ ability to navigate the inventory chopiness withoutsignificant discounting should point to strong brand momentum and demand, in our view.