Shares of Gap Inc. slid more than 16 percent in premarket trading on Friday after its first-quarter performance and outlook disappointed investors.
THE SPARK: Gap reported on Thursday that faster-than-expected cost increases pushed its profit lower in the quarter and the retailer slashed its full-year earnings guidance.
THE BIG PICTURE: Costs are just part of the problems at Gap. The company recently fired its chief designer, who executives felt had not done enough to revive the brand. The company, which also operates the Banana Republic and Old Navy brands, acknowledged it also did more discounting than it though it would have to during the latest quarter.
Gap now expects to earn $1.40 to $1.50 per share for the year, down from its February forecast for $1.88 to $1.93 per share. Before Thursday's earnings report, analysts expected $1.84 per share, according to FactSet.
THE ANALYSIS: Jefferies analyst Randal Konik said in a client note that biggest problem was the outlook, which was worse than expected due to a sharp increase in sourcing costs.
"With weak sales trends, ongoing management/strategy changes and inconsistent consumer behavior, we do not expect Gap to overcome the sourcing headwinds in the second half easily," he wrote.
Konik reduced Gap's price target to $18 from $20 and kept a "Hold" rating.
Jeff Black of Citi Investment Research said the quarterly results were more indicative of the problems that Gap is having as opposed to a reflection of issues within the retail sector.
"Ramping inventory with sluggish sales after a multi-year move to lower unit costs and expenses carried risk in the first place. Coupling it with key personnel changes at the divisional and design levels increased the degree of difficulty," he said.
Black lowered Gap's price target to $20 from $22 and maintained a "Hold" rating for the company based in San Francisco.
SHARE ACTION: The company's stock fell $3.74 to $19.55 before the market opened.