Gap’s (NYSE:GPS) headline Q2 EPS of $0.74 beat consensus $0.69 mainly due to disciplined cost control. Revenue of $3.98b (+3% y/y) was in line with consensus and driven by strength in Old Navy where comps was +4%. Inventory management was encouraging as total inventory was up 6% y/y vs. 3% sales growth, the smallest gap since end of 2012. Inventory growth should be on par with sales growth going forward, which could be margin accretive. Athleta expansion is also on track, with 8 new stores in Q2 and with 100 stores in the US for FY14. However, the fluctuating comp sale is a cause of concern, reflecting unstable demand. Moreover, the softness in gross margin indicates that the company may continue to rely on promotional activities to narrow the inventory growth to sales growth gap. I am staying cautious despite the solid headline numbers.
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Volatile comps points