Gap Shares Jump 7% on Solid Q2 Results and Raised Guidance

Gap, Inc. (GPS) shares jumped almost 7% in Fridays’ pre-market trading session after the global clothing and accessories retailer delivered blowout second-quarter results and raised its FY2021 guidance well above analyst expectations.

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The beat was driven by strong momentum in the Old Navy and Athleta brands aided by higher marketing investments, better brand management, technology enhancements, and more customers returning to stores after easing of Covid-19 restrictions.

Markedly, adjusted earnings of $0.70 per share doubled year-over-year and significantly outperformed analysts’ expectations of $0.41 per share. The company reported a loss of $0.17 per share in the prior-year period. (See Gap stock charts on TipRanks)

In addition, net sales jumped 29% year-over-year to $4.2 billion and exceeded consensus estimates of $4.12 billion. Comparable sales grew 3% year-over-year and increased 12% compared to pre-pandemic levels in 2019.

On top of this, gross margin improved 440 bps to 43.3% compared to the second quarter of Fiscal 2019, driven by merchandise margin expansion of 110 bps and rent, occupancy, and depreciation (ROD) leverage offsetting higher shipping costs. Further, the adjusted operating margin grew 190 bps to 10.2%.

Gap Raises Fiscal 2021 Outlook

Based on the robust Q2 results and strong demand momentum, the company raised its financial guidance for FY2021 well above analysts’ expectations.

The company now forecasts adjusted earnings in the range of $2.10 to $2.25 per share, while the consensus estimate is pegged at $1.78 per share. Net sales are projected to grow approximately 30% compared to FY2020.

Gap CEO Sonia Syngal commented, “I look forward to our Integrated Loyalty Program and Old Navy’s inclusive shopping experience, BODEQUALITY, taking hold in the back half, both key components of our Power Plan 2023, and important drivers of long-term sustainable growth.”

Bank of America Securities analyst Lorraine Hutchinson decreased the price target on Gap from $40 to $32 (21.5% upside potential) and reiterated a Hold rating.

Consensus among analysts is a Moderate Buy based on 4 Buys and 6 Holds. The average Gap price target of $38.80 implies 47.3% upside potential to current levels.

GPS scores an 8 out of 10 on TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.