As a rule of thumb, financial advisors recommend cutting investment losses as soon as reasonably possible since chances are, a beleaguered company may continue to lose even more ground. However, on occasion, red-ink-printing enterprises like fashion retailer Gap (GPS) generate robust positive momentum, enabling stakeholders to exit out of their mistakes relatively unscathed – maybe even pocket a modest profit if lucky.
However, even here, investors interested in long-term success in the equity markets should prioritize capital protection. In other words, the dramatic pop in the afterhours session on Thursday for GPS stock may be a viable opportunity to sell into strength. Although management delivered surprisingly optimistic results for its latest earnings report, no guarantee exists that Gap can sustain the ride.
Looking into the details of the financial disclosure, investors may be better served in other areas.
Reading Between the Lines of the Rally in GPS Stock
As the AP pointed out, Gap reported a loss of $18 million in its fiscal first quarter of 2023. In terms of per-share profitability, the San Francisco-based company stated that it lost 5 cents. When adjusted for one-time gains and costs, earnings per share came out to 1 cent.
Notably, the figure beat Wall Street’s consensus estimate, which called for a loss of 17 cents. On the top line, Gap rang up sales of $3.28 billion, which did fall a bit short of the consensus target of $3.29 billion. However, with such a narrow top-line miss and a resounding bottom-line beat, the market rewarded GPS stock with an outsized performance in the afterhours session.
Still, it’s also possible that bullish investors may be getting ahead of themselves. Unfortunately, all four of Gap’s brands suffered declining sales on a year-over-year basis. Below are the key stats from the company’s Q1 disclosure.
- Old Navy: Posted net sales of $1.8 billion, down 1% YOY. Comparable sales slipped 1%.
- Gap: Posted net sales of $692 million, down 13% YOY. Comparable sales were up 1%.
- Banana Republic: Posted net sales of $432 million, down 10% YOY. Comparable sales were down 8%.
- Athleta: Posted net sales of $321 million, down 11% YOY. Comparable sales were down 13%.
Aside from the namesake Gap brand, comparable sales – which analysts use to measure organic growth from existing stores – decreased across the board, suggesting that management has difficulty resonating with its core audience.
For instance, the Q1 disclosure notes that for Old Navy and Gap, the brands experienced softness in the active and kid’s categories. Regarding Banana Republic, it’s coming off an unfavorable comparison due to prior dramatic growth. However, it too incurred a shift in consumer preferences. Finally, management admitted that Athleta suffered from “product acceptance challenges.”
It’s quite possible that circumstances might worsen from here.
Gap Stares Down a Troubling Consumer Economy
Part of the reason why skepticism might reign for GPS stock centers on the combination of company-specific and macroeconomic concerns. Stated differently, discretionary retailers already face a massive challenge ahead, considering the implications of the debt ceiling crisis, stubbornly elevated inflation and a rising number of companies issuing layoffs, to name but a few negative catalysts. Therefore, adding internal problems to the mix represents unnecessary distractions.
For a weakened entity like Gap which competes with myriad other fashion brands, the earnings results of other companies don’t bode well for GPS stock. As an example, Target (TGT) released its earnings report last week, which failed to impress onlookers. At the time, one of the most alarming disclosures was that organized crime will weigh down the big-box retailer’s bottom line by $500 million.
However, as The Wall Street Journal mentioned, consumers have lately cut back on spending for nonessential items. Frankly, you can’t get more nonessential than Gap-branded clothing. Sure, they look nice but shoppers can easily find alternatives. Plus, fashion trends change, as Gap’s own earnings disclosure reminded us.
Adding fuel to the fire, Gap’s Old Navy brand specifically suffered from “slower demand from the lower-income consumer.” Given the layoffs that have impacted well-compensated workers, we could see slower demand from middle-income or even higher-income consumers. Therefore, investors ought to at least consider selling GPS stock into strength.
Options Traders Aren’t Buying It
Interestingly, many options traders seem unwilling to take the bait. Following the May 25 close, GPS stock represented a highlight in Barchart’s screener for unusual stock options volume. Specifically, out of the volume level of 90,343 contracts (representing a 521.98% delta against the trailing-month average volume), put volume came out to 62,013.
By mathematical deduction, the pairing yielded a put/call volume ratio of 2.19, on paper favoring the bears. With fewer people willing to open their wallets amid so much uncertainty, those who made a mistake in GPS stock may be able to exit at a better price. However, this opportunity might not last indefinitely.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
