Shares of clothing retailer Gap (NYSE:GPS) jumped over 23% in Thursday’s after-hours trading after the company reported stronger-than-expected Q1 financials. Besides for Q1 beat, Gap raised its full-year sales and operating income outlook, signaling that the momentum in its business will likely be sustained in the coming years.
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What stood out is that Gap gained market share for the fifth consecutive quarter, achieving both share gains and positive comparable sales across all brands. Moreover, the company managed to lower inventory levels and maintain a healthy stock-to-sales ratio, which supported margins.
With this background, let’s delve into Gap’s Q1 performance.
Gap Q1 – Sales and EPS Top Street’s Estimates
The company’s net sales increased 3% year-over-year to $3.4 billion, supported by a 3% increase in comparable sales. Further, the company’s top line surpassed the Street’s estimate of $3.29 billion. By sales channel, store sales increased by 3%, while online sales jumped by 5%.
Gap’s gross margin expanded 410 basis points to 41.2%. Lower commodity costs and better inventory management supported the company’s gross margin. The company’s inventory was down 15% year-over-year. Higher gross margin and SG&A leverage led to a 560 basis point year-over-year improvement in the company’s adjusted operating margin.
Gap reported earnings of $0.41 per share in Q1, compared to a loss of $0.05 per share in the prior-year quarter. Moreover, the company’s EPS came in well ahead of the analysts’ expectation of $0.14. The retailer also paid a quarterly dividend of $0.15 per share in Q1. It’s worth highlighting that, including the Q1 beat, GPS has now surpassed the Street’s EPS estimates in the past five consecutive quarters.
Gap Lifts 2024 Outlook
Thanks to the solid Q1 performance and ongoing momentum in its business, Gap’s management raised its 2024 outlook. The company now expects its top line to increase on a year-over-year basis. Earlier, management expected the top line to stay flat.
Gap’s operating income is projected to increase by mid-40% in 2024. Previously, the company expected its operating income to register a low-to-mid teens growth rate.
As for Q2, Gap’s top line is expected to increase by a low single-digit rate. Moreover, the gross margin is projected to increase by 300 basis points.
Is GPS a Good Stock to Buy?
Wall Street analysts are cautiously optimistic about GPS stock. With seven Buys, six Holds, and one Sell recommendations, GPS stock has a Moderate Buy consensus rating.
GPS stock is up about 194% in one year. The analysts’ average price target for GPS stock is $23.82, implying a 5.77% upside potential from current levels.
