Gap, Inc's (GPS) shares slumped over 11% on Friday, the day after the company reported low sales numbers.
The San Francisco-based retailer was mainly hurt by sales at Gap chain stores, which fell by 5%, well below analysts already tempered expectations.
"The Q2 [chain store] trend in Gap brand was unacceptable, but it reflects a conscious choice to optimize margin dollars as we continue to manage through inventory," Gap CEO Art Peck told analysts in the earnings presentation last night.
"We have to acknowledge the challenges at Gap brand, the business is not yet where it needs to be," said Teri List-Stoll, Gap's chief financial officer, as the company is focusing on execution. "We are using the current Gap experience to establish stronger operating discipline across all of our brands, often leveraging the best-in-class processes at Old Navy."
The company blamed inventory changes and shifts in business strategy to increase margin for the retailer. Peck said that with the current changes "the worst is behind us."
"I honestly do believe we have the opportunity to make very significant advancements in our margin over the next 12 to 18 months," he said optimistically.
However, analysts were not as convinced.
"GPS's [earnings] beat was fine in isolation. However, given the rest of our sector's prints in [the last quarter], its margin profile looks underwhelming, and the stock fell 7% after the close," Morgan Stanley analyst Kimberley Greenberger wrote in a note following the earnings call. "Additionally, we question how significant operating margin expansion will materialize."
She remained bearish and issued an underweight rating for the stock and a price target of $25, well below Thursday's closing price of $32.44.
Deutsche Bank analyst was likewise disappointed in the core brand's performance, proclaiming that Gap's issues represent a "different quarter, same problem."
Old Navy to the Rescue
"We believe challenges at the Gap brand present risk to back-half numbers, despite momentum at Old Navy and improvement at Banana Republic," he wrote in his note on August 23. "We believe investors are likely to remain cautious until evidence of progress."
Old Navy reported 5% growth in same-store sales, compared to 4.5% growth estimated by analysts.
Trussell concluded that he would remain "sidelined on shares", issuing a hold rating based on his wariness.
So, despite an earnings report that beat analyst estimates and management's promise of a stronger second half, investor and analyst interest appears tepid as the retail recovery trend seems to have skipped the stock for now.