Apparel retailer Gap (NYSE:GPS) saw like-for-like sales slide in October, despite a positive performance from its Old Navy stores.
The group’s comparable global sales were down 3% from a year earlier in October, with its Banana Republic chain largely responsible for the fall.
Stores operating under the Gap fascia saw sales fall 4% from a year earlier, but Banana Republic’s sales were off 15%.
Old Navy saved some face, with sales up 2% year-on-year.
Traders tore a strip off the fashion firm in screen-based trading after the close of official trading on Monday, driving the shares down 6%.
The group’s sales in October declined to US$1.20bn from US$1.26bn in the corresponding period of 2014.
Third quarter sales eased to US$3.86bn from US$3.97bn in the same quarter of last year.
The retailer indicated that third quarter adjusted earnings per share are likely to be around 62 or 63 cents, compared to market expectations of 67 cents.
Broker Jefferies looked beyond the October weakness for reasons to justify its bullish stance.
With the shares at around US$28.50, the broker has a punchy price target of US$50, and said it remains confident in the long-term positioning of Gap’s portfolio of brands.
The turnaround at the core Gap retail chain remains gradual, the broker concedes, but Old Navy continues to exhibit strength, and the stock’s fortunes may have bottomed out, with only modest downward revisions to earnings per share forecasts expected from now on.
Given the strong predictable free cash flow, the discounted valuation of Gap makes the stock a compelling purchase; the risk element is there but the broker believes the potential reward, as indicated by its price target, merits the risk.
“We are encouraged that efforts to clear through excess inventory in October appear to have been successful, with the company noting that inventory dollars per store are now expected to end 3Q slightly lower than the previous guidance of ‘down slightly.’ While this led to a GM [gross margin] hit in 3Q, it leaves GPS well positioned from an inventory standpoint heading into the key holiday season,” Jefferies said.