What Happened?
Shares of clothing and accessories retailer Gap (NYSE: GAP) jumped 8% in the afternoon session after JP Morgan analyst Matthew Boss upgraded the stock's rating from Neutral (Hold) to Overweight (Buy) after observing signs of margin improvement following a meeting with management. Boss said, "Dickson's (GAP's CEO) consistency playbook is built on a foundation of increased efficiency (i.e., inventory management, marketing, operational savings) and flywheel reinvestment to drive multi-year growth."
GAP's Q3'2024 financial results reflected the profitability improvements observed by the analyst. Notably, gross margin improved relative to the previous year, given the growth outperformance and better inventory management. This allowed the company to exceed key bottom-line estimates projected by Wall Street, including operating margin, adjusted EBITDA, and earnings. As a result, the company raised its gross and operating margin forecasts for FY 24, which is reassuring.
Separately, data from Adobe Analytics, which tracks retail transactions, revealed that shoppers spent a record $10.8 billion online on Black Friday (2024), representing more than a 10% growth compared to the previous year, and more than double what consumers spent in 2017.
This is a bullish 'read-through' for retailers and aligns with some of the positive sentiments and holiday spending trends observed by some of the companies that have reported this earnings season.
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What The Market Is Telling Us
Gap’s shares are quite volatile and have had 16 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 10 days ago when the stock gained 17.8% on the news that the company reported strong third-quarter results that blew past analysts' profit and earnings expectations. Top line growth was supported by a 5% increase in comparable sales for the Athleta brand, which rebounded after a period of declining sales. Additionally, the Old Navy brand saw increased demand as cooler weather drove sales.
Moving to the bottom line, margins improved due to increased inventory management and reduced promotional activity, and this helped the company exceed analysts' EBITDA and earnings expectations. Looking ahead, management noted a strong start to the holiday season. Combined with improved quarterly performance, this allowed the company to raise its full-year sales outlook. Zooming out, this quarter featured many important positives.
Gap is up 23.7% since the beginning of the year, but at $25.85 per share, it is still trading 11% below its 52-week high of $29.03 from June 2024. Investors who bought $1,000 worth of Gap’s shares 5 years ago would now be looking at an investment worth $1,596.
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