Shares of apparel retailer Gap (GPS:NYE) experienced a significant surge of around 14% in pre-market trading on Friday, following the company’s announcement of unexpected adjusted earnings per share (EPS) of $0.01 for the fiscal first quarter. This positive surprise came as Wall Street analysts had anticipated a loss per share of $0.15. The improved profitability was driven by a notable expansion in Gap’s adjusted operating margin, which increased by over 600 basis points in Q1 FY23 compared to the prior-year quarter.
Gap achieved this margin expansion through a 570 basis points increase in adjusted gross margin, resulting from lower air freight expenses and improved promotional activity. However, the company did face inflationary headwinds during the period. To further optimize its operating structure, Gap has implemented measures that are expected to generate $300 million in annualized savings. Half of these savings are anticipated to benefit selling, general, and administrative expenses in the second half of FY23, with the remainder expected in the first half of FY24.
While Gap reported a 6% decline in sales to $3.28 billion for Q1 FY23, in line with analysts’ consensus estimates, the company experienced a 3% decline in comparable sales. The impact of macro pressures on consumer spending, currency headwinds, and the sale of Gap’s business in China all contributed to the decrease in sales. Specifically, store sales and online sales were down 4% and 9%, respectively.
GAP Stock-Future Outlook:
Looking ahead, Gap expects a mid-to-high single-digit decrease in net sales for Q2 FY23 compared to the prior-year quarter’s net sales of $3.86 billion. For FY23 as a whole, the company projects a low-to-mid single-digit decline in net sales. Interim CEO Bobby Martin stated during the Q1 earnings call that Gap is focused on streamlining its operating structure, reducing costs, improving decision-making speed, and enhancing its business creatively. The company is also actively searching for a new CEO after Sonia Syngal stepped down amid supply chain challenges and weak sales last year.
Following the announcement of the Q1 results, Guggenheim analyst Robert Drbul expressed encouragement, particularly regarding Gap’s progress in managing its inventories. Drbul maintained his FY23 and FY24 EPS estimates of $0.65 and $1.20, respectively, to reflect the challenging consumer and macro environment. He reiterated a Buy rating on GAP stock and a price target of $18, emphasizing Gap’s healthier and improved competitive position in 2023. Additionally, with an 8.1% dividend yield, Drbul believes there is significant valuation support at current levels.
Gap currently holds a Moderate Sell rating on Wall Street, based on one Buy, four Holds, and four Sells. The average price target of $10.61 suggests a potential upside of nearly 43%.
Conclusion:
In conclusion, Gap stock experienced a significant surge on the back of better-than-expected Q1 earnings. The company’s focus on optimizing its operations, controlling costs, and improving cash flows positions it well for future growth. However, the challenging consumer and macro environment remain factors to consider. Investors should carefully evaluate Gap’s progress and monitor any developments in its search for a new CEO.
