Gap Earnings Send “Recession Warning”

Stocks experienced a slight downward tick this morning as the major indexes were on the cusp of securing a weekly win. This movement comes as Wall Street processes updates from the retail sector and the implications of oil’s losses in the context of a potentially slowing economy.

The S&P 500 edged down by a mere 0.02%, while the Dow Jones Industrial Average saw a marginal decrease of 0.03%, equivalent to about 11 points. The tech-centric Nasdaq Composite experienced a 0.1% fall.

Despite today’s minor setbacks, all three US indexes are poised for weekly gains, buoyed by a robust midweek rally. This surge in the market was driven by growing confidence that the Federal Reserve might ease up on interest rate hikes. Signs of this potential shift were seen in recent cooler inflation figures and softer jobs data, interpreted as indicators of the central bank’s tightening measures beginning to impact the US economy.

Retail sector updates are also being closely watched by investors for similar signals. Gap, in its latest earnings report, presented a grim outlook for holiday sales, echoing sentiments from Walmart and Target about a potential decline in consumer spending during the crucial shopping season.

Gap, once a top choice for apparel, has been losing ground to competitors like Shein and, who are offering fresher styles. In a post-earnings call, CEO Richard Dickson acknowledged the need for “significant promotions and markdowns” over the past year due to product missteps and ineffective marketing strategies. He emphasized the necessity of creating “trend-right product assortments with a clear point of view.”

Analysts had expected a slight increase in Gap’s fourth-quarter net sales, but the company is projecting these to be flat or slightly negative. Sales at Banana Republic and Athleta dropped 11% and 18%, respectively, in the third quarter, while Old Navy, Gap’s largest brand, saw a 1% decline.

Deborah Weinswig, CEO of Coresight Research, expressed concern over Gap’s across-the-board sales drop, suggesting that the company’s focus should remain on addressing its product-assortment challenges.

Despite these challenges, Gap has been implementing cost-cutting measures, including job eliminations and store closures. These efforts, along with easing freight and manufacturing costs, have positively impacted the company’s results. Gap reported an adjusted profit of 59 cents per share, significantly surpassing the expected 19 cents. Its net sales of $3.78 billion, largely driven by Old Navy, exceeded the anticipated $3.60 billion.

CFRA Research analyst Zachary Warring noted Old Navy’s success this quarter, contrasting it with Athleta’s continued decline. He commended Gap for its strong balance sheet and effective inventory management.

Gap’s CFO, Katrina O’Connell, indicated a longer recovery timeline for Banana Republic and Athleta, with sales expected to continue declining through the fourth quarter. The company reiterated its expectation of a mid-single-digit range decline in net sales for fiscal 2023.

In the oil sector, prices hinted at an economic slowdown, entering a bear market ahead of the upcoming OPEC+ meeting. West Texas Intermediate crude and Brent crude futures both rose on Friday, yet they are still headed for a weekly loss after reaching their lowest levels in nearly four months.

Adding to the market’s complexities, Alibaba’s decision to scrap the spin-off of its cloud unit drew attention to challenges faced by the Chinese e-commerce giant. This move, influenced by Washington’s chip curbs, also underscored the ongoing tensions in US-China relations, despite recent meetings between the countries’ leaders.

All in all, it seems the walls are closing in on the idea of a “no landing” outcome for the economy. The landing looks increasingly “hard” with each passing earnings report and data release, which should only make investors more uncomfortable over time.


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