GAP Gaps Lower Following 25% EPS Guidance Cut, Loses Fight With Inflation

Tyler Durden's picture

Oops. Just out from The Gap: "As stated earlier in the year, the company expects business performance during fiscal year 2011 to be heavily impacted by pressure from sourcing cost inflation, particularly in its value channels. While the company anticipated that the cost of goods would increase during the back half of the year, costs are actualizing above the initial estimates. The company now expects product costs per unit to be up about 20 percent in the back half of the year, which will more than outweigh retail price increases. As a result, the company has revised guidance for fiscal year 2011 diluted earnings per share to be in the range of $1.40 to $1.50." The problem is that previously the company had seen an EPS range of $1.88-$1.93, with a consensus of $1.84. To all those who were wondering why nobody was guiding lower ahead of the Q1 earnings season, the answer is... the waited until it was over. As for how the company plans to mitigate its plunge in earnings: "The company now expects net openings of about 75 stores, including
franchise stores, during fiscal year 2011. This figure is up from the
company’s previous guidance of about 65 stores, driven primarily by
additional Outlet store openings in North America." When you can't control price, you can at least control volume... Even if that means inventory liquidation sales within a month or so of opening the new stores: "The company reported that inventory per store was up 9.9 percent at the
end of the first quarter of fiscal year 2011 compared with last year,
slightly higher than expected driven by decreased sales associated with
the events in Japan." So much for the consumer stepping up. And time to go very short consumer discretionary stocks, just as we suggested three days ago.