The Gap, Inc. GAP reported third-quarter fiscal 2024 results, wherein the bottom and top lines surpassed the Zacks Consensus Estimate and grew year over year. GAP posted earnings of 72 cents per share, which surpassed the Zacks Consensus Estimate of 56 cents and surged 22% from the prior-year quarter’s adjusted figure.
Quarterly results benefited from immense strength in brands and higher market share. The company gained market share for the seventh straight quarter. It has been smoothly progressing on the reinvigoration of its brands. The company has been actively managing costs. Management is focused on its four strategic priorities, such as driving financial and operational rigor, reinvigorating the brands, reinforcing its operating platform and energizing culture.
Net sales inched up 2% year over year to $3.829 billion and beat the consensus estimate of $3.796 billion. The metric grew for the fourth straight quarter. Comparable sales (comps) rose 1% year over year. The company saw sturdy results at Old Navy, momentum at Gap, progress at Banana Republic and revert to growth at Athleta. Online sales grew 7% year over year, accounting for 40% of the total sales. However, store sales dipped 2% year over year.
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Impressively, Gap’s shares jumped 15.7% in the after-hours session yesterday, following robust third-quarter results and a raised outlook for fiscal 2024. Shares of this Zacks Rank #3 (Hold) company have gained 7.1%, outperforming the industry’s 2.5% drop over the past six months.
GAP’s Brand-Wise Sales & Comps Performance
Old Navy: Net sales at Old Navy Global edged up 1% year over year to $2.2 billion. Comps were flat year over year, gaining from its focus on operational rigor and brand reinvigoration, aided performance in the quarter, in spite of the lapping tough comparisons and weather-related headwinds. Sales for Old Navy Global beat our model’s estimate of $2.1 billion.
Gap Global: Net sales grew 1% year over year at $899 million, while comps increased 3%, highlighting the fourth straight quarter of positive comps. Gap's strong product and solid marketing execution aided the brand’s performance. Sales for Gap Global surpassed our model’s estimate of $896.1 million.
Banana Republic: Net sales grew 2% year over year at $469 million, with comps declining 1%. Sales exceeded our estimate of $457.9 million. Strength in its men's business and focus on fixing the fundamentals drove the results.
Athleta: Net sales increased 4% year over year to $290 million and comps also grew 5%. Net sales came above our estimate of $283.9 million. The brand reverted to positive comps in the reported quarter, as the brand’s latest product and marketing resonated well with customers.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
GAP’s Margins & Costs
The gross margin of 42.7% expanded 140 basis points (bps) from the prior-year period’s reported figure. Meanwhile, we estimated the adjusted gross margin to be 41.8%.
The merchandise margin grew 90 bps, benefiting from inventory-management efforts. Rent, occupancy and depreciation (ROD), as a percentage of sales, leveraged 50 bps year over year.
Further, the operating margin of 9.3% grew 250 bps in the reported quarter from last year’s adjusted operating margin. This marked the highest Q3 operating margin over the last seven years.
Our model anticipated an adjusted operating margin of 7.2%.
Operating expenses came in at $1.3 billion, almost flat year over year.
GAP’s Financial Health Snapshot
Gap ended the fiscal third quarter with cash and cash equivalents of $2 billion, up 45.7% from the year-ago period. As of Nov. 2, 2024, it had a total stockholders’ equity of $3.1 billion and a long-term debt of $1.5 billion.
The company is focused on disciplined inventory, ending the fiscal third-quarter levels down 2% year over year. Management expects ending inventory to be similar to the last-year’s levels, depending on the present macroeconomic landscape.
As of Nov. 2, 2024, the company generated $870 million in cash from operating activities and had a free cash flow of $540 million. It paid cash dividends of $169 million in the 39 weeks ended Nov. 2, 2024. The company’s board has approved a dividend of 15 cents per share for the fiscal fourth quarter. Capital expenditure was $330 million in the nine months of fiscal 2024. For fiscal 2024, capital expenditure is expected to be $500 million.
As of the aforementioned date, Gap had 3,603 stores in nearly 40 countries, of which 2,544 were company-operated.
What to Expect From GAP in Fiscal 2024?
Owing to the robust fiscal third-quarter results, GAP raised its outlook for sales, gross margin and operating income growth for fiscal 2024. Entering the fiscal fourth quarter, the company is excited about its holiday collection, and is focused on enriching the customer experience both online and in-store. GAP has refreshed the product imagery on its website and remodeled 15% of its store fleet.
For fiscal 2024, management projects sales to grow 1.5-2% on a 52-week basis versus $14.9 billion recorded in fiscal 2023. Earlier, it anticipated sales to rise slightly on a 52-week basis. The company expects gross margin expansion of at least 220 bps from gross margin of 38.8% seen in fiscal 2023 versus a minimum of 200 bps expected earlier. This includes 100 bps of commodity cost gains realized in the first half of the fiscal year. The balance will be mainly backed by improved inventory management. ROD, as a percentage of sales, is likely to be relatively neutral year over year.
For fiscal 2024, operating income is now projected to grow in the mid to high 60% range versus the prior year’s adjusted operating income of $606 million. Operating expenses are still forecast to be around $5.1 billion, and the effective tax rate is estimated to be 26.5%. GAP predicts SG&A of roughly $5.1 billion for the fiscal year, reflecting reduced spending and leveraged year-over-year substantial savings.
For the fiscal fourth quarter, gross margin is predicted to be similar year over year, excluding roughly one percentage point of deleverage ROD from soft sales in the quarter owing to the absence of the 53rd week.
Key Picks
We have highlighted three better-ranked stocks, namely Deckers DECK, BootBarn BOOT and Abercombie ANF.
Deckers, a footwear and accessories dealer, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Deckers’ current financial-year sales indicates growth of 13.6% from the year-ago figure. DECK delivered an average earnings surprise of 41.1% in the trailing four quarters.
Boot Barn, a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories, currently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 6.8%, on average.
The Zacks Consensus Estimate for Boot Barn’s current financial-year sales indicates growth of 13.4% from the year-ago figure.
Abercrombie, a leading casual apparel retailer, currently carries a Zacks Rank of 2. ANF delivered an earnings surprise of 16.8% in the last reported quarter.
The consensus estimate for Abercrombie’s current financial-year sales indicates growth of 13% from the year-ago figure.
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