On Friday, JPMorgan updated its financial outlook on Gap Inc. (NYSE: NYSE:GAP), increasing the price target to $28 from the previous $26 while keeping a Neutral rating on the stock. The adjustment follows Gap's third-quarter earnings report, which surpassed Wall Street's expectations. Gap's adjusted earnings per share (EPS) for the third quarter came in at $0.72, which was 24% higher than the Street's forecast of $0.58. This performance was attributed to stronger-than-anticipated results across all metrics.
Gap experienced a year-over-year net sales increase of 1.6%, despite a 100 basis point negative impact from weather conditions, which exceeded the Street's projection of a 1.2% rise. Additionally, the company saw a gross margin (GPM) expansion of 140 basis points year-over-year, reaching 42.7%, which was 50 basis points higher than the Street's expectation of 42.2%.
The selling, general, and administrative (SG&A) expenses leverage improved by 110 basis points to 33.4%, compared to the Street's forecast of 34.0%, resulting in third-quarter operating margins of 9.3%, which was 120 basis points above the Street's anticipation of 8.1%.
Detailing further, Gap's third-quarter same-store sales grew by 1%, with Athleta and Gap brands outperforming expectations. Athleta's same-store sales increased by 5% against the Street's prediction of a 3.0% rise, and Gap's same-store sales were up by 3%, compared to the Street's estimate of a 2.3% increase. However, Old Navy's comparable sales remained flat, falling short of the Street's 1.4% growth expectation, and Banana Republic's comparable sales declined by 1%, slightly more than the Street's forecast of a 0.8% decrease.
Looking ahead, Gap's management has revised its full-year 2024 net sales forecast to a range of 1.5% to 2.0% growth on a 52-week basis, which is an improvement from the previous guidance of a slight increase and higher than the Street's expectation of 0.5%. The company also expects a greater gross margin expansion of approximately 220 basis points year-over-year, exceeding both the prior guidance of 200 basis points and the Street's prediction of 210 basis points. The full-year 2024 SG&A expense guidance remains unchanged at $5.1 billion.
These revisions suggest an earnings before interest and taxes (EBIT) growth in the mid-to-high 60% range, surpassing the previous mid-to-high 50% range, with adjusted EBIT margins projected at around 6.8%, compared to the Street's estimate of 6.6%. Consequently, Gap's full-year 2024 EPS is estimated to be approximately $2.00, above the Street's forecast of $1.88.
In other recent news, Gap Inc. reported second-quarter earnings that surpassed expectations, with net sales reaching $3.72 billion. This performance was attributed to an updated offering of trendy and fashionable items that attracted customers. Additionally, Gap's earnings per share exceeded expectations due to better-than-anticipated profit margins. However, Gap's third-quarter sales guidance was described as "up slightly," indicating a cautious stance.
Recent developments also include Gap Inc. amending the vesting terms for its performance-based restricted stock units for fiscal years 2024-2026. This move is designed to align more closely with the performance period, providing immediate vesting upon performance certification. Furthermore, Gap Inc. has adopted a Senior Executive Severance Plan set to take effect in 2024.
Analyst firms TD Cowen and Citi maintained a Buy rating for Gap, expressing continued confidence in the company despite a reserved sales outlook. Morgan Stanley (NYSE:MS) upgraded Gap's rating from Equalweight to Overweight, predicting a 20% increase in stock price and expecting the company's 2024 earnings per share to be $1.82. These are part of the recent developments surrounding the company.
InvestingPro Insights
Gap Inc.'s recent financial performance and JPMorgan's updated outlook align well with several key metrics and insights from InvestingPro. The company's P/E ratio of 10.67 suggests that the stock may be undervalued relative to its earnings, which is particularly interesting given the recent earnings beat and raised guidance.
InvestingPro Tips highlight that Gap has maintained dividend payments for 49 consecutive years, demonstrating a strong commitment to shareholder returns. This consistency in dividend payments, coupled with the current dividend yield of 2.72%, may be attractive to income-focused investors.
The company's revenue for the last twelve months stands at $15.17 billion, with a slight growth of 0.44%. This aligns with the article's mention of a 1.6% year-over-year net sales increase in the third quarter. Additionally, the gross profit margin of 49.28% for the last twelve months supports the reported gross margin expansion in the recent earnings report.
For investors seeking more comprehensive analysis, InvestingPro offers 6 additional tips for Gap Inc., providing a deeper understanding of the company's financial health and market position.
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