Gap shares slump as retailer says it will take months to fix inventory issues

Gap. Inc. shares slumped on Friday as the retailer said inventory issues at its flagship store will take months to resolve.

Gap Inc.  , whose brands also include Banana Republic and Old Navy, reported first-quarter earnings per share of 42 cents, up from 36 cents last year but below the 46 cents FactSet-compiled analyst consensus. Revenue, on the other hand, beat expectations, totaling $3.78 billion, up from $3.44 billion the prior year and ahead of the $3.61 billion FactSet guidance.

Gap’s Chief Financial Officer Teri List-Stoll described the issues at Gap as the brand being “heavy on inventory,” which impacted margins, and the “timing of inventory flow,” according to a FactSet transcript of the earnings call. The Gap brand’s chief executive, Jeff Mirwan, left the company in March. The missteps led to promotions during the quarter and a $28 million inventory charge.

“As back-to-school aligns with the beginning of the back half, that is when we feel like we’re largely out of the operational issues,” said Art Peck, chief executive of Gap Inc. That’s also when changes to areas like inventory and assortment “should start to impact.”

Shares sank 12.2% in Friday trading.

SunTrust Robinson Humphrey analysts are more wary.

“While management seems confident in their ability to turn the Gap brand around in the second half, we have little to hang our hat on as of yet as the challenges at the division weighed on both comps and gross margin in the first quarter and inventory has not been fully right-sized,” analysts led by Pamela Quintiliano wrote. “Old Navy has been firing on all cylinders but the performance in the first quarter was not enough to drive margin improvement at the company level despite representing just under half the business.”

Same-store sales at the Gap brand fell 4% while same-store sales rose 3% at both Old Navy and Banana Republic. Overall, same-store sales increased 1%, below the FactSet consensus for a 1.7% increase.

The FactSet same-store sales consensus for Old Navy was 4%.

SunTrust rates Gap Inc. shares hold and lowered its price target to $29 from $35.

Others are more confident.

“On a longer term basis, we are excited about Gap’s responsive capabilities, the value orientation of the portfolio – as well as cash flow yield and scale,” wrote Cowen analysts led by Oliver Chen. “While the Gap brand is a work-in-progress, we do believe FY18 guidance is largely achievable with Old Navy and Athleta continuing to deliver solid results with consistency, combined with improving performance at Banana Republic.”

Cowen rates Gap shares market perform with a $35 price target.

Gap’s CFO List-Stoll notes that even with the problems at Gap, “our traffic remains better than the industry on the Gap brand ” with “better overall engagement.”

J.P. Morgan highlighted that in its note.

“Our recent fieldwork points to signs of more stable footing at the Old Navy concept with encouraging underlying signs pointing to core Gap product slowly resonating with customers leading to more stable top-line trends and opportunity for merchandise margin recapture on greater use of strategic promotions,” analysts said.

J.P. Morgan rates Gap Inc. shares neutral with a price target of $29, down $1 from $30.

Gap shares are down 15.5% for the year so far while the S&P 500 index   is up 2% for the period.