Key insights
- Gap Inc. (GAP) stock plunged over 17% after reporting a lackluster first quarter and trimming its annual sales outlook. While namesake Gap stores performed well, weakness in Old Navy and Athleta offset gains, leading to a reduced sales growth forecast. This signals potential consumer pullback on discretionary spending due to inflation. JPMorgan downgraded the stock to neutral, citing mixed brand performance, while UBS maintained a buy rating, expecting improvements.
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The gap between the performance of The Gap and the clothing retailer's other brands is weighing on its stock.
Shares of The Gap (GAP) were down over 17% in recent trading to $20.60, giving up nearly all of their recent progress that brought them close to even for the year, after the apparel retailer reported a lackluster first-quarter and trimmed its sales outlook for the year.
The Gap posted adjusted earnings of 38 cents per share for the first quarter, 1 cent ahead of the analyst consensus compiled by Visible Alpha, while sales of $3.50 billion came in just shy of estimates. Comparable store sales for all of Gap's combined brands were up 2%, short of the 3% consensus forecast, as a strong quarter from Gap stores was offset by weakness from its other brands.1
The owner of its namesake clothing brand, along with Old Navy, Banana Republic, and Athleta, said it now expects sales growth of 1% to 2% this year, down from 2% to 3% previously. Gap forecast second-quarter sales could be flat to down 1% year-over-year, while analysts had been calling for 2% growth.
A weaker market for clothing brands like Old Navy and Banana Republic could be a signal that consumers are pulling back spending on discretionary items like new clothes as rising inflation pressures budgets.
JPMorgan analysts downgraded Gap stock to a neutral rating following the results, and cut their price target to $27 from $35. They said that while CEO Richard Dickson has "implemented a foundation of improved merchandising & marketing across all four brands," the outlook for Gap's brands is mixed, with Athleta and Old Navy facing challenges.2
UBS analysts were more bullish, retaining a "buy" rating. They suggested that while Old Navy's comparable store sales miss was disappointing, they expect the company can fix the issues that led to the weak sales in the coming months.3
With Friday's slump, Gap shares are down nearly 20% since the start of the year.
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