Gap plunges on earnings

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  • Gap is down almost 14% after missing its first-quarter earnings.
  • The Gap brand continued to weigh on margins even as Old Navy and Athleta showed strong performance.
  • Jefferies believes the company needs reduce exposure to the Gap brand at a faster pace and allocate capital to the Old Navy and Athleta brands instead.
  • Watch Gap trade in real-time here.

Gap is down nearly 14% after reporting disappointing first-quarter results. The Gap brand weighed on company margins, distracting from the stronger Old Navy and Athleta brands.

Gap reported earnings of $US0.42 per share, missing the $US0.46 estimate from analysts surveyed by Bloomberg. Revenue of $US3.78 billion beat the $US3.6 billion estimate but EBITDA fell short. The retailer reported EBITDA of $US355 million, which missed the expected $US385 million.

“We believe capital should continue to be diverted away from Gap/[Banana Republic] and toward Old Navy/Athleta to maximise EPS and cash flow,” Jefferies analyst Randal Konik wrote in a note to investors.

The Gap brand was “just plain disappointing” as it struggled with heavy markdowns that squeezed gross margin in an attempt to sell off more inventory. Meanwhile, Old Navy remained strong, reporting comparable sales of 3%. Konik wrote the company should reduce its exposure to the Gap brand at a faster rate and give capital to Old Navy and Athleta.

He believes the market assigns “no value” to the Athleta business aspect of Gap. Athleta which competes against Lululemon Athletica in the athletic-apparel category is strong and growing, he wrote. However, with the business still a fourth of the size of Lululemon, he suggested Gap put look for a value-creation opportunity in the year ahead.

The retailer made no changes to its full-year guidance.

Gap is down 16% this year.

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