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Factors Likely to Decide Gap's (GPS) Fate in Q1 Earnings

The Gap, Inc. GPS is scheduled to report first-quarter fiscal 2020 numbers on Jun 4, after market close. In the last reported quarter, the company delivered a positive earnings surprise of 41.5%. Moreover, the bottom line surpassed the consensus estimate by 11%, on average, in the trailing four quarters.

The Zacks Consensus Estimate for fiscal first-quarter loss of 50 cents has significantly widened in the past 30 days from a loss of 32 cents mentioned earlier. Notably, the company reported earnings of 24 cents per share in the prior-year quarter. For revenues, the consensus mark is pegged at $2.56 billion, indicating a decline of 30.9% from the figure reported in the year-ago quarter.

Key Factors to Note

The coronavirus outbreak in China, followed by Japan and Europe, mainly led to supply-chain disruptions and soft customer demand in the regions in the first quarter of fiscal 2020. Regarding the supply chain, the company has migrated its vendors from China in the past year and currently sources only 16% of goods from China (down from 21%). However, it expects to witness the impacts of factory closures in China, as a large portion of fabrics is produced in mills in China, which is supplied by vendors outside China.

The Gap, Inc. Price and EPS Surprise

 

The Gap, Inc. Price and EPS Surprise
The Gap, Inc. Price and EPS Surprise

The Gap, Inc. price-eps-surprise | The Gap, Inc. Quote

Coming to demand suppression, the company expects significant impacts from store closures and soft traffic trends in China, which was the most affected region and accounts for 3% of Gap’s global sales. Further, it anticipates witnessing the negative impacts of the same from Japan and Europe due to store closures and reduced traffic. Collectively, soft performance in the countries is expected to get reflected in the company’s top and bottom-line results for the fiscal first quarter.

Furthermore, given the growing cases of COVID-19, it has closed stores in North America since Mar 18. The company also withdrew the guidance provided on Mar 12. It expects to re-issue forecasts after assessing the situation on its May 2020 conference call.

Further, it has been continuing to witness soft comps for the past few quarters, mainly impacted by a decline in the namesake brand.

Nevertheless, Gap’s Old Navy and Athleta brands have been growth drivers in the pre-coronavirus outbreak environment. Further, its focus on improving product assortment, managing inventory and reducing promotions bode well. Moreover, it remains confident of Old Navy’s growth potential, driven by solid execution of its unique value equation and strong positioning.

Zacks Model

Our proven model doesn’t conclusively predict an earnings beat for Gap this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Gap carries a Zacks Rank #3, an Earnings ESP of -32.00% makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat.

Fastenal Company FAST currently has an Earnings ESP of +2.37% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chicos FAS, Inc. CHS has an Earnings ESP of +51.92% and a Zacks Rank #3 at present.

Darden Restaurants, Inc. DRI currently has an Earnings ESP of +15.19% and a Zacks Rank #3.

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