So based on The Gap's (GPS) earnings results... and we know exactly nothing magically changed overnight. Another clothing retail disaster hits the streets. I'm very curious to see how Stitch Fix (SFIX) reports now. Is this a foot traffic issue in the malls, a fashion trend specific issue, or an economic issue? Big Lots (BIG) produced better than expected results with in-line guidance echoing similar results as the other frugal retailers like Walmart (WMT) , Target (TGT) , Dollar General (DG) , and Dollar Tree (DLTR) . Granted, these names don't live and die on clothing, so it is not quite apples to apples, but there is a trend.
Thursday after the bell, Gap reporting earnings per share of $0.24, well below the $0.32 consensus estimate on revenue of $3.71 billion. The revenue number also missed expectations. Worse, it showed a decline of 2% year-over-year. The full year guidance range of $2.05 to $2.15 is well short of current estimates at $2.46. Even taking into account the Q1 miss of eight cents already in the books, investors can expect a shortfall in earnings sometimes over the next three quarters. Given we only have the full year, it could all come in Q2 or be spread out throughout the year.
The breakdown of the big three within Gap saw Gap Global down 10%, Banana Republic down 3%, and Old Navy down 1%. This shouldn't be a surprise. Old Navy, of any Gap property, is the one that most represents the economically sensitive shopper. Next year, Gap plans to separate into two publicly traded companies. This should unlock some "value" as I believe investors will want to own the new standalone Old Navy company. Gap, Banana Republic, and Athleta will form the other company and may find a home with income investors. I imagine that will be the dividend paying company of the two.
Gap continues to pay an annual dividend now above 5% with an additional share buyback of $50 million per quarter. The question is how long will this continue. While the company does hold $1.2 billion in cash, but with negative free cash flow of $136 million this past quarter, buybacks and dividends are simply coming from cash not from operations. It's not an issue...yet, but keep an eye on that situation.
Over the past 18 months, Gap shares have been a big mover the following 2-3 weeks the day AFTER the day after earnings. Yes, that's intentional. I'm not talking about measuring the moves from yesterday (the day before earnings), but rather today's close (the day after earnings). That's likely why you see the June 21, 2019, $18.50 call/$18 put strangle still pricing an 8.6% move despite the big 11% move thus far today. It's not a terrible trade although I would probably struggle it like this:
The Trade:
Buy to open June 21, 2019, $18.50 call
Buy to open June 21, 2019, $18 put
Sell to open June 21, 2019, $20 call
Sell to open June 21, 2019, $16.50 put
Net cost estimate $93
I'd target $88-$90. If I got hit, then great, but otherwise, I'd sit it out.
