GPS – Market expectations are for Uniform ROA to fade, but management is confident about margins, inventories, and their online business

• The Gap, Inc. (GPS:USA) currently trades near recent averages relative to UAFRS-based (Uniform) Earnings, with an 18.9x Uniform P/E. At these levels, markets are pricing in bearish expectations, but management is confident about their margins, inventory levels, and online business

• Specifically, management is confident that their margin expansion continued into the third quarter, their recently launched rental business attracted a larger following than planned, and their Q3 EPS was $0.37. Moreover, they are confident that inventory levels will continue to decrease, their allocation improvements are expected to increase yield, and that they have seen benefits from their actions regarding women’s product inventories. Furthermore, they are confident about the progress of their online business and that brands are more open and have been able to avoid distractions going into the holiday season. In addition, they are confident about Old Navy’s unique value equation and positioning, their holiday plans, and their focus on flexible promotional messaging, as opposed to blanket promotions