Analyst Note| David Swartz |
No-moat Gap’s Old Navy and Athleta led the company to flat year-over-year sales in the third quarter of 2020, a marked improvement from the large declines of the previous two quarters and better than our forecast of a 7% drop. An 8% increase in operating expenses, though, resulted in an operating margin of just 4.4%, 10 basis points below our forecast. Gap reported higher expenses from store closings, safety measures related to the pandemic, and increased marketing to support its brands. Moreover, higher shipping costs are expected to impact the fourth quarter. Gap’s shares, which have risen steadily over the past few months, dropped about 11% in post-market trading. We do not expect any significant change to our $20.50 per share fair value estimate on Gap and judge it to be overpriced.