On March 27, I argued that Gap (NYSE:GPS) could have years of upside ahead. Unfortunately, in the days and weeks following, GPS stock started on a downward trajectory. Earnings last week, however, show that the leadership of CEO Richard Dickson is beginning to benefit the bottom line.
Gap’s first-quarter 2024 earnings report beat expectations on all key metrics, demonstrating the company’s financial and operational strength. Earnings per share came in at 41 cents versus estimates of 14 cents, while revenue of $3.39 billion beat forecasts of $3.29 billion. Put simply, these are phenomenal numbers relative to what Wall Street was expecting, which makes me think that analysts are underestimating how well Gap’s turnaround is going.
Dickson’s approach is working. Gap posted its fifth consecutive quarter of market-share gains and positive comparable sales year over year, across all brands.
One of the main reasons Gap is bouncing back now is a reinvigoration of its brands. Old Navy, Gap, Banana Republic, Athleta – all those brands reported positive comparable sales gains, with Athleta rising fastest at 5%. When this kind of rejuvenation occurs, it can do wonders to keep a company on the right side of the retail wave and ensure many new and old customers buy. This is all clearly demonstrated from a financial standpoint.
While other retailers are struggling, Gap appears to be in a much more positive spot.
Why? Because its margin is looking solid here. It increased by 410 basis points to 41.2% and its merchandise margin jumped 340 basis points. Its cash, cash equivalents, and short-term investments grew by 48% to $1.7 billion, and the company has a ton of financial breathing room. On top of that, its management of inventory continues to improve as it was down 15% over the prior year. Things are humming along smoothly. With Gap upping its full-year forecast, saying it expects net sales to increase, compared with its prior forecast for flat sales growth, there’s nothing not to really like here.
The Bottom Line on Gap (GPS) Stock
I think the long-term performance potential for Gap is real. It seems to be pulling away from weakness in other retailers. This is a classic story of new management driving new outcomes.
Richard Dickson seems to know what he’s doing in a challenging industry. The company’s ability to beat expectations, gain market share and improve its brands’ positions it for further successes in a highly competitive fashion market. As far as I am concerned, I believe that Gap has great growth potential and big chances to surprise positively over the next few years.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
