Gap Stock Heats Up Ahead Of Summer Clothes Shopping Season

After the market closed on March 7th, Gap Inc. (GPS) smashed through Wall Street’s earnings expectations for the second consecutive quarter, initiating a notable rally in the stock. The apparel retailer went on an 11-day winning streak, during which its stock surged by 47%. This rally marked a remarkable phase in the company’s recovery, which had been negatively impacted by macroeconomic challenges, fierce online competition, and a problematic exit from the Chinese market.  

Gap reported fiscal Q4 2023 earnings of $0.49 per share, a substantial improvement from the $0.75 per share loss reported in the same quarter a year ago. This performance, which followed a strong third-quarter beat, handily surpassed the consensus estimate of $0.23 per share, underscoring the success of management’s turnaround strategy.   

Despite only a 1% increase in year-over-year sales to $4.3 billion during the crucial holiday shopping quarter, Gap’s profitability is clearly improving. The company achieved a fourth-quarter gross margin of 38.9%, up 530 basis points from the previous year, driven by lower commodity costs and a more favorable promotional environment.   

Additionally, reductions in rent, occupancy, and depreciation (ROD) expenses further bolstered profitability. With consumer inflation easing, further declines in operating costs are anticipated, potentially leading to enhanced profits in fiscal 2024. 

Shoppers Are Rediscovering Gap And Old Navy brands 

CEO Richard Dickson noted “improved trends” at flagship Gap stores and Old Navy, highlighting a recovery from ongoing inflation and rising interest rates that continue to impact apparel spending. Prior to the modest 1% increase in the last quarter, Gap’s revenue had declined for four consecutive quarters.   

The resurgence in top-line growth was fueled by a 4% increase in comparable sales at Gap and a 2% rise at Old Navy. Particularly at Gap, women’s clothing continued to be a strong performer, capturing market share for the fifth consecutive quarter. However, Banana Republic and Athleta experienced declines, with sales falling 4% and 10% respectively.   

While management anticipates overall sales to remain flat in fiscal 2024, the renewed interest in Gap’s core brands is a positive sign. As the company introduces new summer collections across men’s, women’s, and children’s lines, there could be potential for unexpected revenue increases, especially if the Federal Reserve cuts interest rates, enhancing consumers’ purchasing power for new apparel. 

Wall Street Opinions On Gap Are Mixed 

With Gap stock soaring nearly 300% from its May 2023 low, analysts are divided on its future path. Wells Fargo recently upgraded its price target from $25 to $32, maintaining an Overweight rating, following investor meetings with Gap’s CEO and CFO.   

Despite this optimism, four other research firms have already seen their bullish price targets surpassed by Gap’s rapid share price increase. Meanwhile, around six analysts hold neutral or bearish views, including Bank of America, which predicts a potential 40% decline in the stock.   

Gap is not alone in experiencing a resurgence; the U.S. apparel retail sector has seen significant recoveries. For example, Abercrombie & Fitch’s stock has escalated nearly 400% over the past year, buoyed by improvements in margins and inventory management. Similarly, large-cap peers Ross Stores and TJX have reached new record highs this year, reflecting broader sector strength.