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Takeaway: How’s that sum of the parts valuation looking now?

GPS showing us why it’s a close to a retail perma short as you can get.  Gap brand slowed 500bps on an easier compare to comp down 10%.  Old Navy slowed 100bps on a much easier compare, slowing 350bps on the 2 year.  Banana slowed 200bps.

Company operating margins were down 260bps, to 3.5%, and earnings declined 43%.   Inventory remains bloated even as the company stepped up promotions to help clear inventory in the quarter.  It’s indicating its merch plan should bring inventory in check in 2H though.

Art Peck found his scape goat in weather, citing unprecedented moisture, temperatures, violent weather, etc.  But it seems like GPS is calling out unfavorable weather every quarter, so why should we expect weather to ever get any better.

Also tax refunds were also called a drag.  It’s funny, coming into 1Q the bull case for retail like GPS was easy weather compares and higher tax refunds. Now it’s the reason for a miss. 

This all matters because there was an important question from one analyst about the planned separation of Old Navy (which management remains very committed to).  He asked if the second half doesn’t go as planned, much like this quarter, would the dis-synergy impact of the separation make the risk to the business too great to do it?

Peck replied with: “If I thought that somehow that quarter represented a fundamental overnight step-function change in the structural profitability of this industry, that would be a different consideration.”

Well, indications are the consumer hasn’t consciously chosen to reduce spending yet, but we actually expect consumer to start slowing spending materially in the coming quarters.  So if weather can make you miss so badly in 1Q, what happens in 2H when weather is unfavorable again, AND the consumer is slowing consumption.  Is that an “overnight step function change”?  Will that mean the separation is off?

Management can say they are “not pleased” with results until they are blue in the face, but much of the commentary suggests GPS is in a structurally pressured business.  The actions have confirmed that as it relates to Gap’s restructuring, and we wonder how long it will be until Old Navy looks similar.

The other callout here is the lack of disclosure on key business items.  One being online sales growth, other than saying Old Navy had double digit comps online, there was none.  The other item is of course credit.  Why mention credit as it’s just upwards of 45% of EBIT based on 606 disclosure (depending how big gift card breakage is).. nbd.  I thought 606 was to help have this kind of info broken out, all the department stores a breaking out a new revenue line for it, so why not GPS?  It’s as bigger or bigger for it than the others.

Lastly tariffs are a risk, not huge but a risk as GPS noted 21% of its goods come from China, and 16% of apparel is sourced there.

I wouldn’t touch GPS stock with a 30 foot pole.  Until we get some real numbers on the profitability trajectory of the separated businesses, I am not going to put a valuation floor on the stock.  Remains on short bench.