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The Gap (GPS) Earnings Preview

by | Aug 21, 2021

The Gap (GPS) reporting earnings on 8/26 after the close with the Street looking for $0.43 on $4.12B in sales. Next quarter is guided to $0.43/$4.2B and the FY is $1.78/$17.14B. Shares have closed higher in five of the last seven with an average closing move of 4% and a max move of 19.6%. The current implied move is 6.9%. GPS shares are back near the 38.2% Fibonacci of the strong run from the 2020 lows and back at a low-volume gap from earlier this year. The current downward channel has resistance around $30 and a break higher can run back to recent peak near $35. Shares put in a nice weekly hammer last week. Options flow has been bullish as well with buyers on Friday in the weekly $29/$33 call spread with the $25 puts sold, buyers in the Sept. $28 and $31 calls while sellers active in the March $25 puts, Sept. 24th (W) $25 puts, and January $28 puts. The $11B company trades 12.77X earnings, 0.71X sales, and 10.75X FCF with a strong cash position and 1.27% yield. GPS has been undergoing a big transformation over the last year as they close stores, become more digital dominant and reinvest in high-growth brands like Athleta. They also have been expanding into new partnerships like their collaboration with Walmart and later Kanye West which should be a positive for the quarter after selling out within hours. Old Navy has been a very successful brand for the company and approaching 50% of their overall revenue with continued momentum last quarter and should extend into back-to-school season this fall as well. Analysts have an average target for shares of $32.50 and a Street High $45. Wells Fargo positive on 8/3 citing strength of their Athleta brand. The firm notes that the recent deal for Sweaty Beatty would value Athleta at near $4.5B, far below what the Street ascribes the brand now. Deutsche Bank upgrading GPS to Buy in July as volatile trends are now largely behind the company and the firm sees a path to consistent EBIT margin gains, driven by a reduction in fixed costs, mix shift to the higher-margin and growth businesses of Old Navy and Athleta, and improved profitability at the Gap brand. Short interest is 8.15%. Hedge fund ownership fell 18.5% last quarter.

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