Gap shares slump as July sales disappoint, but analysts upbeat

Shares of apparel retailer Gap Inc fell more than 7 percent in early trading on Tuesday, a day after the company reported a drop in sales for July, but analysts were largely positive about the company's prospects.

At least six brokerage raised price targets on Gap's stock, based on the company's upbeat second-quarter profit estimate.

Apparel retailers such as Gap are struggling to attract shoppers, who are increasingly prefer to shop online or at fast-fashion retailers such as H&M (HMb.ST), Forever 21 and Inditex's Zara.

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To fight back, Gap has been tightly controlling inventories, cutting back on promotions and replicating the success of its low-end Old Navy brand at its Gap and Banana Republic chains since Art Peck took over as chief executive last year.

Gap will report results for the quarter on Aug. 18 but released quarterly sales and a profit estimate on Monday. The company said it expected a second-quarter profit of 58-59 cents per share, far above analysts' average estimate of 48 cents.

Nomura analyst Simeon Siegel said he expected Gap to report a "meaningful" profit beat for the second quarter ended July 30, largely driven by merchandise margins.

Disappointing sales in July could be put down to hot weather across the United States and a drop in traffic at Banana Republic stores, analysts said.

"Given the July comp sales miss, we anticipate shares will come under pressure, particularly given the strong run-up the shares achieved this quarter," Stifel analyst Richard Jaffe wrote in a client note.

Up to Monday's close, Gap's shares had risen 18 percent in the past month and fallen by more than a quarter in the past 12 months. The stock was trading at $23.79 shortly after the opening bell on Tuesday.

Gap's total sales fell 1.3 percent in the second quarter, but the decline was smaller than the 3.1 percent analysts had expected, according to Thomson Reuters I/B/E/S.

"Performance was uneven within the quarter, with challenging traffic in May and July," Gap's senior vice president of investor relations, Jack Calandra, said on Monday.

Gap reported a surprise rise in same-store sales for June. But analysts said the disappointing sales in July served as a reminder that traffic trends remained volatile and that the timing of a sustained recovery was uncertain.