Gap & Aeropostale, From Bruised to Battered (GPS, ARO)

Aeropostale, Inc. (NYSE: ARO) and Gap Inc. (NYSE: GPS) are getting slaughtered after earnings reports that are both full of bad news ahead.  Both are former glory stocks, and both are stuck and back under the gun. If you are holding any apparel players at the moment, you might want to take a look at the commodity inflation being seen. There are some valuable lessons to be learned.

Gap Inc. (NYSE: GPS) earnings looked okay on the surface  despite a 22% drop, but it slashed its annual outlook on product inflation. Gap sees earnings now between $1.40 and $1.50 per share for the current year.  The prior guidance was closer to $1.90 at the mid-point.

If you want to know what product inflation is, Gap sees costs up about 20% this year.  There is now way in hell that any retailer can pass along that much of a price hike.  Gap would have seen its same-store sales down about 5% in the quarter had it not been for online sales.  The adjusted figure was down 3%; overseas sales were down 6%.

Gap shares closed up 0.9% at $23.29 today, but the after-hours session has shares down almost 13% at $20.30 and the 52-week range is $16.62 to $23.73.  Gap shares had already traded above the consensus price target of $23.13 before today, so now you can likely expect that target to come down.  Shares were already believed to be fairly valued as is, but now they are just expensive considering the poor guidance and the higher costs.

Aeropostale, Inc. (NYSE: ARO) saw a 64% drop based on higher materials costs and deep discounting.  Now, the company sees earnings at $0.11 to $0.16 EPS versus Thomson Reuters estimates of $0.27 EPS.  Sales were up 1% to $469.2 million.

Aeropostale shares closed down 0.5% at $21.34 today, but the stock is down over 9.5% in the after-hours session at $19.30 and its 52-week range is $20.50 to $31.31.

Gap is just back in the soup that it has been in for years. Aeropostale is now going to be hitting 52-week lows as its pain is going from bad to worse.  Analysts only have a consensus price target of $23.29 as of now, but you can expect that to drop in the coming days.

JON C. OGG