The Gap (GPS) is falling fast on Friday after a first quarter report that badly missed the mark Thursday after the close. Shares of the San Francisco-based apparel retailer are set for their lowest open in about three years, marking a nearly 14% drop in pre-market trading.
For the three months ended May 4, the company's fiscal first quarter, the print came in at 24 cents per share, well shy of the Street consensus forecast of 32 cents, while revenues fell 2% year over year and same-store sales slumped 4%, the steepest in three years.
"Obviously we're disappointed in our Q1 results," CEO Arthur Peck told analysts on Thursday evening. "Not unlike others in the industry, our results highlight some of the macro challenges we all faced."
He said that a confluence of weather trends, holiday shifts, and tax changes were significant factors impacting performance that remained out of control of management.
"While traffic and sales trends improved as we moved through March and April, it was difficult to overcome the extremely slow business that we and others encountered in February," Peck commented. "We also missed opportunities on our own, and we could have executed, as always, better across places in our brands."
Peck worked to encourage optimism on the call, noting the company's efforts to deliver better results for the second half of the year as many macro trends potentially roll off.
"We recognize that the needs of our customers are changing, and we're not waiting around hoping that we muddle through. We're running towards what we see as an exciting next step in our evolution," he said.
Breaking Down the Breakup
The key piece of the company's plan moving forward is the separation of its Old Navy brand, a part of the business that many analysts have dubbed "best in class" despite reporting results that were just as disappointing as the core business in the quarter.
The spin-off is being highlighted as management as the next major catalyst that could turn the ship's recent downtrend around. Jim Cramer also recently highlighted the necessity of the move to reinvigorate sales and make Old Navy more able to succeed as it stands alone from 2020 onward.
Still, many analysts are not convinced this is much of a positive, especially as the core brand sinks.
"We view Old Navy as best of breed, but with nominal GDP at 5%, unemployment sub-4% and wage growth benefiting the US consumer - core Gap's inability to demonstrate same store sales improvement raises forward concerns if macro tailwinds moderate in 2019," JP Morgan analyst Matthew Boss wrote in his review.
Boss downgraded the stock from "Neutral" to "Underweight" amid the company's inability to perform in solid conditions, questioning the core brand's sustainability should macro trends deteriorate.
With tariffs expected to increase on the 21% of goods the company imports from China expected to increase shortly and further taxes on imports from Mexico added into the mix, the foreseeable macro trends are certainly not courting optimism.
Similarly, SW Retail Advisors President Stacey Widlitz questioned the timing of the Old Navy spin-off, noting it is not a panacea to the myriad of problems confronting the company.
"I wonder if the "break-up" or as Art Peck, CEO of GPS called it during his Vegas Shoptalk Speech "conscious uncoupling" is perhaps more of a sign that Old Navy's margins have peaked than it is a way to create value," she wrote in a recent blog post. "The big question is: Will the separation unlock significant shareholder value and change the current trajectory of potentially peak Operating Margins, which were under significant pressure during Q4? Having covered retail for two decades retail history tells me companies often make big decisions when things are looking as good as it gets."
With no new financial disclosures on the dynamics of the spin-off made available and weak performance from Old Navy reflected in the print, these questions will linger.
Don't Buy the Dip?
As such, despite the drastic drop and commentary on a brighter future led by the spin-off, many on Wall Street are still not moved to view The Gap as a buying opportunity as it joins its peer PVH Corp. (PVH) in the anxiety-addled corner of the apparel sector.
"We remain on the on the sidelines for now, optimistically awaiting greater visibility, as evidenced in data across email receipts, credit card data, and mall traffic, culminating in a signal showing a spark in consumer spending," Wedbush analyst Jen Redding wrote in a note to clients on Friday. "Shares of GPS currently trade at a 38% discount to the company's historical P/E multiple, which we see as fair for a shares of a retailer led by a management team who have been trying to turn the namesake brand around for the last 4 years with limited success thus far."