Gap stock soars 15% on guidance raise, solid third-quarter results

Investing.com — Gap hiked its annual guidance and touted optimism ahead of the crucial holiday period following blowout third-quarter earnings underpinned by improved margins.

Gap Inc (NYSE:GAP) jumped more than 15% in premarket trading Friday. 

For the three months to Oct. 28, the San Francisco-based owner of brands like Athleta and Banana Republic reported earnings of $0.72 per diluted share on revenue of $3.8 billion. That compared with analysts’ estimates for EPS of $0.58 on revenue of $3.81B.   

Same-store sales increased by 3%, above estimates for a rise of 2.3%.

Gross margin jumped 140 basis points to 42.7% points versus last year’s gross margin.

Looking ahead, the retailer now expects 2024 net sales to be up between 1.5% to 2% from the prior year’s $14.9B, compared with a prior forecast for net sales to be up slightly. Gross margins were forecast to expand 220 basis points, up from a prior estimates of 200bps. 

Morgan Stanley (NYSE:MS) analysts reiterated an Overweight rating on Gap shares after the report and raised the price target to $30 from $29. 

“We leave the print with further conviction in brand reinvigoration execution, as well as near-term & long-term EPS upside potential – which we think can drive further valuation re-rating,” analysts led by Alex Straton. 

Separately, Jefferies analysts commented that Gap’s mix shift toward Old Navy and Athleta brands should bolster its margin structure. However, the investment firm cautions that “there are still risks around Old Navy maintaining its historical growth and margin rates, especially with growing competition.”

“We believe slowing trends at Old Navy (drives ~60% of revenue and even more of profit) will be a key focus among investors near term,” they added.

Alongside strong results, Gap also touted optimism ahead of the key holiday shopping season period.

“Holiday is off to a strong start and we remain focused on executing with excellence in the fourth quarter,” the company said.

Yasin Ebrahim contributed to this report.