The Gap’s Gap: Share’s Fall 3% on Disappointing Sales, Susquehanna Downgrade

The Gap (GPS) reported disappointing sales yesterday–disappointing enough that investors ignored its profit projections to force the stock lower today.

Bloomberg

The Wall Street Journal has the details:

[For] the four weeks ended Aug. 3, same-store sales rose 1%, falling short of the 1.6% consensus view. Gap stores posted a 7% rise when 1.7% growth was expected, while Banana Republic’s same-store sales declined 1%, compared to expectations for a 1.6% decline. Old Navy recorded a 5% decline in same-store sales, missing expectations for 2.4% growth…

For the quarter ended Aug. 3, the retailer said it expects per-share earnings of 62 cents to 64 cents, topping the 59 cents estimated by analysts polled by Thomson Reuters. Net sales for the quarter rose 8% to $3.87 billion, also topping analysts’ projections of $3.8 billion.

As a result of the announcement, the Gap’s shares have dropped 3.4% to $43.96, after opening down 1.8%, far cry from the big gain following its June report.

Many analysts were far more positive than the market, however. Janney Capital Market’s Adrienne Tennant and Gabriella Carbone, for instance, blame the sputtering sales on difficult comparisons. They write:

…we continue to remain encouraged by solid traffic trends seen across all divisions and expect sustainable positive comps going forward. A key initiative for 2013 is to drive increased revenues through new brands, channels, and geographies, such as Athleta, Gap China, Old Navy Japan, franchises, and global outlets. GPS also has planned to start franchising Old Navy in 2014 in key international markets and are exploring the opportunities to add company-operated Old Navy and Banana Republic stores in China. We believe the new global brand management structure of the business will continue to build upon overall brand strength, help attain greater speed and efficiencies, as well as fuel future long term growth. Overall, we continue to believe the company will benefit from ongoing momentum at all three divisions.

Lazard’s Jennifer Davis, meanwhile, believes the Gap will be able to “maintain sales momentum though 2H despite more difficult compares.” She raised her price target to $52 from $50.

Even a downgrade from Susquehanna’s Thomas Filandro–he cut the stock to Neutral from Positive–was done executed because the stock had gotten too expensive. Filandro writes:

Another well executed quarter for GPS. Although we are once again raising our EPS projections and increasing our price target, we are downgrading to Neutral from Positive based entirely on valuation. Since November 2011, GPS shares have appreciated 137%. We applaud management’s execution of the business, distribution of excess cash to shareholders and focus on building an omni-channel global presence. We are raising our 12- month price objective to $49.

Sterne Agee’s Ike Boruchow and Tom Nikic, however, worry that margins might have peaked. They write: