After Gap Inc. Crushed Earnings Estimates Last Week, is the Stock a Buy?

Clothing and accessories retailer The Gap, Inc. (GPS) sells apparel, accessories, and personal care products under the Old Navy, Gap, Athleta, and the Banana Republic brands internationally. Last week, the San Francisco-based specialty apparel company delivered its highest second-quarter net sales in more than a decade. The company’s strong sales growth across its Old Navy and Athleta brands and accelerated marketing investments have helped its stock gain 31.3% in price year-to-date. In addition, GPS’ comparable sales rose 3% year-over-year and were up 12% versus 2019 in the second quarter of 2021. Moreover, GPS raised its full-year 2021 guidance.

Although COVID-19 related store closures resulted in a roughly 2% sales decline versus 2019, GPS’ focus on strategic category expansion and acquisition in markets outside of the United States should drive its growth in the long run.

Furthermore, as fall approaches, its initiatives to digitally transform GPS and boost its online sales should help it deliver market-beating returns in the near term.

Click here to checkout our Retail Industry Report for 2021

Here is what we think could shape GPS’ performance in the coming months:

Favorable Analyst Estimates

Analysts expect GPS’ EPS to increase 72% year-over-year to $0.43 in the next quarter ending October 2021. Its consensus EPS estimates indicate a 185.3% increase in the current year and a 23.9% increase next year. In addition, GPS has an impressive earnings surprise history; it surpassed the consensus EPS estimates in three of the trailing four quarters.

A $17.15 billion consensus revenue estimate for the current year represents a 24.3% improvement year-over-year. Also, its revenue is estimated to increase 3.3% in fiscal 2023.

Accelerating Digital Transformation

This month, GPS acquired Drapr, an e-commerce startup and online application that allows customers to try on clothing virtually with the help of 3D technology. The move should  help the retailer reduce the number of returns and help its customers find the best clothing fit by quickly creating 3D avatars. In addition, Drapers’ advanced technology should help GPS offer a personalized and inclusive fit experience to its customers and support its ongoing digital transformation efforts.

In July, GPS’  Athleta brand launched AthletaWell, an innovative and immersive digital platform to create a community for women and develop long-term relationships with its new and existing customers. Also, the brand teamed with a digital fitness platform, obé Fitness, to increase brand loyalty and provide a unique engagement opportunity for its customers. By offering exclusive fitness content for AthletaWell members, GPS is well-positioned to boost its digital offerings and grow its customer base.

Impressive Quarterly Performance

GPS’ net sales increased 29% year-over-year to $4.2 billion in the second quarter, ended March 31, 2021. The company’s Old Navy Global net sales amounted to $2.39 billion, representing a 27.1% increase year-over-year. Under the Gap Global brand, GPS’ net sales came in at $974 million, up 24.4% from its  year-ago value. Its net income totaled $258 million for the quarter, versus a $62 million net loss in the prior-year period. Furthermore,  the company’s gross profit increased 58.7% year-over-year to $1.82 billion, and its EPS came in at $0.67, compared to a $0.17 loss per share in the second quarter of 2020.

Raised Full-year Guidance

GPS’ management lifted its full-year net sales forecast for the second consecutive quarter based on the strong demand for its Old Navy and Athleta clothing brands as consumers embrace in-person shopping with easing pandemic curbs. It expects its net sales growth for its  fiscal year 2021 to be approximately 30%, versus 2020. GPS’ full-year EPS is expected to be in the range of $1.90 - $2.05. In addition, the company’s adjusted operating margin guidance has been raised to approximately  7.5%. This represents progress in its commitment to achieving the goal of a 10% operating margin by the end of 2023.

POWR Ratings Reflect Rosy Prospects

GPS has an overall B rating, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. GPS has a B Sentiment Grade, which is consistent with analysts’ expectation that its revenue and earnings will grow.

Also, in terms of Growth Grade, GPS has a B. The company’s strong financial performance and growth estimates are in sync with this grade.

In addition,  it has an A grade for Momentum. This justifies the stock’s 52.5% gain over the past year.

Click here to see the additional POWR Ratings for GPS (Value, Stability, and Quality).

The stock is ranked #10 of 64 stocks in the A-rated Fashion & Luxury industry.

Bottom Line

GPS plans to open some  30 - 40 Old Navy and 20 - 30 Athleta stores in 2021 as its Old Navy and Athleta clothing brands continue to gain momentum. Also,  as the company invests substantially in growing its digital footprint to tap the surge in online shopping and capitalize on the growing demand for its popular lifestyle brands, we think it is well-positioned to maintain its robust financial performance and witness long-term sustainable growth. Therefore, the stock could be a solid bet now.

How Does the Gap (GPS) Stack Up Against its Peers?

While The Gap, Inc. (GPS) has an overall B (Buy) rating, one might want to consider looking at its peers Shoe Carnival, Inc. (SCVL), Genesco Inc. (GCO), and Dillard’s, Inc. (DDS) that have overall A (Strong Buy) ratings.

Click here to checkout our Retail Industry Report for 2021

GPS shares rose $0.08 (+0.30%) in premarket trading Monday. Year-to-date, GPS has gained 32.94%, versus a 21.30% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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