Crater deviations after a catastrophic quarterly report

Gap (GPS) is in free fall Friday after a first-quarter report that severely missed the mark on Thursday after the close. Shares of the San Francisco-based clothing retailer are expected to be at their lowest open level for about three years, marking a nearly 14% drop in pre-market trade.

For the quarter ended May 4, the first quarter of the company's fiscal year, the print was established at 24 cents a share, far from the Street consensus forecast at 32 cents, while revenues fell 2% over the previous year and same-store sales fell 4%, the steepest in three years.

"We are obviously disappointed by our first quarter results," chief executive Arthur Peck told analysts on Thursday. "As in the sector, our results highlight some of the macro challenges we all face."

He said the convergence of weather patterns, vacations and tax changes were important factors affecting performance that was out of the control of management.

"While traffic and sales trends improved over the months of March and April, it was difficult to overcome the extremely slow business we and others encountered in February," he said. commented Peck. "We also missed opportunities on our own and we could, as always, be better at all levels of our brands."

Peck strives to encourage optimism in the face of the call, noting the company's efforts to achieve better results for the second half of the year, while many macroeconomic trends may disappear.

"We recognize that the needs of our customers are evolving and we are not expecting hope, we are moving towards what we see as an exciting next step in our evolution," he said. declared.

Break the break

The key element of the company's plan is the separation of the Old Navy brand, an activity that many analysts have called "best in class" despite disappointing results as the main activity of the quarter.

The spin-off is put forward as a management as the next major catalyst that could reverse the recent downward trend of the ship. Jim Cramer also recently stressed the need to boost sales and make the Old Navy more successful, by 2020 alone.

Nevertheless, many analysts are not convinced that this is very positive, especially as the main brand collapses.

"We consider Old Navy to be the best of breed, but with a nominal GDP of 5%, an unemployment rate of less than 4% and a wage growth benefiting the American consumer – Gap's inability to demonstrate Sales improvement in comparable stores is raising concerns if the tailwind is moderating in 2019, "JP Morgan analyst Matthew Boss wrote in his article.

Boss downgraded from "neutral" to "underweight" because of the company's inability to perform under strong conditions, challenging the sustainability of the primary brand if the macroeconomic trend deteriorated.

While tariffs on the 21% of goods are expected to increase, the company's imports from China are expected to increase soon and the addition of taxes on imports from Mexico, predictable macro-economic trends only certainly do not raise optimism.

Similarly, Stacey Widlitz, president of SW Retail Advisors, asked about the Old Navy's spin-off schedule, noting that it was not a panacea for the myriad of problems that the company was facing.

"I wonder if the" separation "or as Art Peck, CEO of GPS, called it" conscious decoupling "during his speech at the Vegas Shoptalk, is perhaps more a sign of the fact that margins of Old Navy have peaked only in value creation, "she wrote in a recent blog post. "The big question is this: will the divestment generate significant shareholder value and change the current trajectory of potential maximum operating margins, which are under significant pressure in the fourth quarter? retail for two decades, the history of retail tells me that companies often make big decisions as beautiful as possible. "

In the absence of new financial information on the dynamics of the spinoffs made available and the poor performance of Old Navy reflected in the print, these issues will persist.

Do not buy the dip?

So, despite the drastic fall and commentary on a better future driven by the spin-off, many Wall Street are still not thrilled to view The Gap as a buying opportunity as they join their peers. PVH Corp. (PVH) in worry. corner of the clothing sector.

"We remain on the sidelines for the moment, optimistically awaiting greater visibility, as evidenced by data on e-mails received, credit card data and mall traffic, resulting in a signal showing a spark consumer spending, "wrote Wedbush analyst Jen Redding. a note to customers on Fridays. "GPS stocks are currently trading at a discount of 38% on the company's historical P / E multiple, which we believe is fair to the shares of a retailer managed by a management team that has been trying to straighten the brand for 4 years with limited success so far. "