What's In The Cards For Gap (GPS) This Earnings Season?

Gap Inc. (NYSE:GPS) is slated to release third-quarter fiscal 2017 results on Nov 16. The question lingering in investors’ minds is, whether this leading specialty retailer will be able to deliver a positive earnings surprise in the soon-to-be reported quarter.

The company’s earnings have outpaced the Zacks Consensus Estimate in three of the trailing four quarters, with an average beat of 9.3%.

Let’s see how things are shaping up prior to the earnings announcement.

Which Way are Estimates Treading?

In order to get a clear picture of what analysts are thinking about the company right before earnings release, let’s have a look at the earnings estimate revisions. The Zacks Consensus Estimate for the fiscal third quarter has been stable at 55 cents in the past 30 days but reflects more than 8% decline from the year-ago quarter.

Further, analysts polled by Zacks expect revenues of $3.8 billion to be almost in line with the prior-year quarter. The consensus mark for net sales at the Gap Global, the Banana Republic Global and the Old Navy Global segments are pegged at $1,269 million, $540 million and 1,773 million, respectively. While these estimates reflect growth of 3% for Gap Global and 0.9% for Old Navy Global, it reveals a decline of 6.7% for the Banana Republic Global segment, compared with the last quarter.

Factors at Play

Gap’s shares have gained 14.4% year to date, as against the industry’s decline of 20.6%. This performance was driven by its solid focus on enhancing product quality and responsiveness to changing consumer trends. Meanwhile, the company has been making constant efforts to boost its digital and mobile offerings, besides improving product acceptance. Also, Gap’s new growth strategy focused on growing its Old Navy and Athleta brands looks promising.

However, results continue to be soft at the company’s namesake and Banana Republic brands. Moreover, going forward, management expects SG&A expenses to increase at a higher rate than the first half. This mainly stems from increased product, marketing and digital investments for the significant back-to-school selling season. The company expects the rise in costs to hurt its bottom line.

Further, Gap’s significant international presence exposes it to adverse currency fluctuations. Though the company’s earnings and sales topped estimates in the previous quarter, currency headwinds caused results to decline year over year. Unfortunately, management expects these hurdles to persist in fiscal 2017, which in turn might dent the quarterly results.

What the Zacks Model Unveils?

Our proven model does not show that Gap is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Gap has an Earnings ESP of -0.76%. Although its Zacks Rank #3 increases the predictive power of ESP, the stock’s negative ESP does not make us confident of a positive earnings surprise.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Zumiez Inc. (NASDAQ:ZUMZ) has an Earnings ESP of +0.69% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Home Depot, Inc. (NYSE:HD) has an Earnings ESP of +0.40% and a Zacks Rank #2.

Fastenal Company (NASDAQ:FAST) has an Earnings ESP of +0.12% and a Zacks Rank #3.

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