Earnings preview: Old Navy spinoff to take center stage in Gap’s Q1 report

Gap, Inc. (NYSE: GPS) is on the threshold of a major transformation, and the planned separation of the Old Navy brand will be in the spotlight when the apparel retailer releases its third-quarter results Thursday evening.

On the revenue front, the recent trend is expected to continue. Sales are forecast to remain broadly unchanged at $3.77 billion. The estimate for earnings is $0.32 per share, down 24% year-over-year.

Like in the past, comparable store sale is estimated to have been impacted by the lackluster performance of Gap’s namesake brand, which is facing multiple challenges including assortment problems and operational issues. The unfavorable exchange rate is another negative factor that can weigh down on the top line.

On the revenue front, the recent trend is expected to continue and sales are forecast to remain broadly unchanged

It is likely that the ongoing efforts to streamline marketing and revitalize the Gap brand will offset the impact of the headwinds to some extent. Unlike some of its peers, Gap has consistently strived to build a competent e-commerce platform and the result was visible in the previous quarter. It is hoped that improved omnichannel capabilities and better product quality would translate into sales this time.

Sensing the long-term impact of faltering sales, the management is in the process of splitting the company into two separate public entities, giving investors fresh hope of getting returns. The focus of the restructuring is separation the Old Navy brand, the most prominent among Gap’s business units that accounts for nearly half of its sales. As per the plan, Gap and the other brands will come together to form the second company, to which leading children’s clothing firm Janie & Jack is expected to become a part.

For the fourth quarter, Gap reported a 38% surge in earnings to $0.72 per share on revenues of $4.62 billion, which was down 3%. The top line was crushed by lower sales at all the business segments, led by the Gap brand that witnessed a 5% fall in comp sales.

Among others, American Eagle Outfitters (AEO) will be reporting first-quarter results on June 5 early morning. Earlier this month, The Children’s Place (PLCE) reported an 80% fall in earnings to $0.36 per share for the first quarter when sales dropped about 6%.

Reflecting the growing investor concern over the company’s performance in the recent quarters, the stock slipped to a three-year low this week and is trading slightly above $20. It lost around 26% in the past twelve months and 17% since the beginning of the year.

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