Gap (GAP), one of America’s largest specialty apparel companies, has raised its guidance ahead of the holiday season after seeing a “strong start” to the fourth quarter. This comes on the back of strong quarterly results that significantly exceeded Wall Street’s expectations, boosting the share price by roughly 18% in the past week. With the stock trading at a relative discount to industry peers, it is positioned favorably for further upside, making it an appealing option in the apparel industry.
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Gap Repositions for Growth
Gap is an iconic specialty apparel company. Its brands, including Old Navy, Gap, Banana Republic, and Athleta, provide a wide range of clothing, accessories, and lifestyle products for all genders and ages.
The company is in the early stages of a brand overhaul. It has worked to refresh its stores, elevate the Old Navy and Athleta brands, and is focused on revitalizing the Banana Republic brand for a more upscale demographic.
Gap’s Recent Financial Results
The company recently reported results for Q3 2024. Net sales of $3.8 billion showed a 2% increase compared to the previous year. The company’s store sales took a slight dip of 2%, however, online sales increased by an impressive 7% and accounted for 40% of total net sales. Gap’s gross margin showed a healthy increase of 140 basis points compared to last year, with a significant contribution from an improved inventory management system, leading to a 90 basis points surge in merchandise margin.
As of the quarter’s end, the company had reposted $2.2 billion in cash, cash equivalents, and short-term investments—an increase of 64% from the previous year. The company’s promising financial results and steady dividend payments indicate a strong prospect of future buybacks or dividends.
Gap announced a third-quarter dividend of $0.15 per share, totaling $57 million. The company’s Board of Directors approved a fourth-quarter fiscal 2024 dividend of $0.15 per share.
Following its third-quarter earnings, Gap’s management issued an update to its full-year Fiscal 2024 financial outlook. The company has revised its net sales growth estimate upwards from a slight increase to a 1.5% to 2.0% rise on a 52-week basis. There’s also a projection of an approximate 220 basis points growth in gross margin, an improvement from the previously predicted 200 basis points. The operating expenses are expected to remain around $5.1 billion, similar to previous forecasts. Operating income is anticipated to grow in the mid to high range of 60%, a positive adjustment from the earlier mid-to-high 50% range.
What Is the Price Target for GAP Stock?
The stock has been on an upward trend, climbing 31% over the past year. It trades near the upper end of its 52-week price range of $18.34 – $30.75 and shows positive price momentum by trading above all major moving averages. The stock looks undervalued with a P/S ratio of 0.6x compared to the Apparel Retail industry average of 2.37x.
Analysts following the company have taken a cautiously optimistic view of GAP stock. For instance, BMO Capital analyst Simeon Siegel recently increased the share price target from $23 to $25 while maintaining a Market Perform rating, noting the company’s strong Q3 performance, growing market share, and merchandise margin expansion.
Gap is rated a Moderate Buy overall, based on 15 analysts’ recent recommendations. The average price target for GAP stock is $27.92, representing a potential upside of 12.26% from current levels.
Final Thoughts on GAP
Following a strong Q4 start and impressive Q3 outcomes, the Gap has adjusted its growth estimates and is favorably positioned for further progress. With its brand overhaul initiatives bolstered by escalating online sales and improved inventory management, the company is well-positioned for further growth potential. With the stock’s undervalued status and upward price trend, it is a compelling option for those looking to invest in the apparel industry.
