The retailer raised its full year guidance on strong start to Q4.
The Gap (NYSE:GAP) stock was surging on Friday, up about 10% in early trading, after the company posted solid Q3 results and an encouraging fourth quarter outlook.
The well-known clothing brand had a solid third quarter as net sales rose 2% year-over-year to $3.83 billion, which was slightly ahead of estimates of $3.81 billion.
Net income climbed 25% to $274 million, while earnings per share increased 24% to 72 cents per share. It was an impressive earnings result as analysts projected EPS of 58 cents per share.
But what was most encouraging for investors was its strong start to the holiday shopping season, as it caused management to raise its full-year 2024 outlook.
Gapping up
The Gap has been on a nice run lately, after falling hard during the 2022 bear market and high inflationary environment. Since about this time last year, Gap stock has gained more than 80%, from about $13 per share at the end of October 2023, to roughly $24 per share as of Friday’s surge.
CEO Richard Dickson said the company has now logged four straight quarters of earnings growth and is gaining market share across its brands, which include The Gap, Old Navy, Banana Republic, and Athleta.
“Consistent execution of our strategic priorities, including the rigor and repetition we’re applying to our brand reinvigoration playbook, is making us a stronger company and demonstrates our continued progress in unlocking Gap Inc.’s full potential,” Dickson said in the earnings release.
In the quarter, comparable sales overall across the brands climbed 1% year-over-year. That breaks down to a 2% decrease in store sales and a 7% increase in online sales. It’s notable that 40% of total sales were online.
Gap’s biggest brand, Old Navy, saw sales increase 1% to $2.2 billion, while The Gap stores had a similar gain to $899 million. Banana Republic sales climbed 2% to $469 million, while Athleta sales surged 4% to $290 million.
On the expense front, Gap lowered both its cost of sales, by 0.7% to $2.1 billion, and its operating expenses, by 2% to $1.28 billion. This led to a 42% increase in operating income to $355 million, and an operating main of 9.3%. The gross margin spiked 140 basis points year-over-year to 42.7%.
Raising outlook on strong holiday shopping numbers
The Gap raised its outlook for the full year, primarily on the strong Q3 and the early returns during the fourth quarter holiday shopping season.
“Holiday is off to a strong start and we remain focused on executing with excellence in the fourth quarter,” Dickson said in the earnings release. “Our performance year-to-date gives us the confidence to raise our full year outlook for sales, gross margin and operating income growth.”
In an interview with CNBC post earnings, Dickson said the company is “energized” about the holiday season.
“Our teams are really focused on executing our plans. If we compare ourselves to where we were last year, our brands are in a much more pronounced place than they were last year,” Dickson told CNBC.
The Gap is now calling for net sales to be up 1.5% to 2% for fiscal 2024, up from previous guidance of “up slightly.” It is also anticipating 220 basis point expansion in gross margin for the year, up from 200, and operating income in the mid-to-high 60% growth range, up from the mid-to-high 50% range.
Analysts were fairly impressed by the results, as several, including BofA, Morgan Stanley, Wells Fargo, and JPMorgan Chase boosted their price targets for the Gap stock.
Gap stock is very cheap, trading at 10 times earnings, with a five-year PEG ratio of 0.67. With its fine cost management and market share gains, it looks like it still has some room to run.
