Gap reported a 23% drop in Q1 net income yesterday attributing the drop to inflation costs.What’s more, the company company has revised guidance for fiscal year 2011 and expects diluted earnings per share to be in the range of $1.40 to $1.50 about $0.30 lower than estimates.
The stock is off about 16% today, making it one of the big losers on the market.
Now Citi analyst Jeff Black says this is more a comment on the company, than the industry:
- First he thinks the 20% hike in costs for the past holiday season is worrisome and that the consensus for the second half of FY 2011 is too optimistic.
- He also argues that Gap should have expected these risks when it decided to ramp inventory after its sluggish sales.
In a separate report, JP Morgan analyst Brian J. Tunick also has unpleasant things to say about the brand.
- First, the company’s core product is weak. Women’s fashion, especially tops are way off the mark.
- He echoes Black and says that the company’s management “merry go round” is to blame. Recently, Patrick Robinson, executive vice president of Gap Global Design for Adult and Body was let go. Both reasons make it hard for a turnaround of the brand.
- On a the plus side he thinks that while sourcing (cotton) can’t be ignored in the near-term, its a seasonal concern. In the long-term the company should see higher returns from its expanding online presence to Canada, China and certain European countries.
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