The Gap, Inc.: Buy Dips

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The Gap, Inc. has shown a strong turnaround with Q3 revenue of $3.82 billion and positive comparable sales across most brands.Gross margin expanded to 42.7%, improving earnings power, while net income...

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(NYSE:GAP). What is interesting here is that since our last coverage, the company has taken a huge symbolic move and had recently changed its ticker from \"GPS\" to \"GAP.\" This came on the heels of the company's 55th anniversary. We like the move, even though it does not impact the investment. What does impact the trade here is performance. The company just reported earnings which we will discuss, providing another tradeable bounce. We have caught some nice short-term gains in this stock both for the public and over at BAD BEAT Investing. Back in November 2023, we put out a buy call on GAP, telling you it was back from the brink and the shares would head higher. We had a pretty big 70% return on that one in just two quarters. We then reissued a buy in May with another big pop. Since then, the stock has trickled lower until the most recent report. We still think shares are a buy here, though, would suggest waiting for another fade before reentering. Longer-term, the turnaround is unfolding, and the brand is being revived in our opinion. Let us discuss performance and why we remain positive on the name. When examining any retailer, we believe that the number one metric you should monitor is comparable sales. Overall in Q3, revenue was $3.82 billion, up 0.5% compared to last year. Now here is the thing. Comparable sales were mostly positive at all four brands in the Gap portfolio. That is strong. Comparable sales were up 1% year-over-year. Store sales actually decreased 1% compared to last year. Online sales increased 7% compared to last year. Still, overall in our opinion, this is a turnaround from sales that had long been falling for years. The company has figured things out. Turning to the segment specifics, we saw Banana Republic comparable sales were down 1%. This was the only negative comp. Old Navy saw flat comparable sales compared to last year. The Gap brands saw strong 3% increases in comparable sales, while Athleta led with strength, showing 5% comparable sales growth. In the year ago quarter, comparable sales were down in all brands except Old Navy, which posted a 1% gain. So, we see this as a strong turnaround. We also like to watch margin power. On top of comparable store sales increasing, there was once again margin expansion. Margins drive earnings power. Gross margin was 42.7% and increased 140 basis points versus last year's quarter. Merchandise margin improved 90 basis points versus last year, while there as 50 basis points of improvement on rent, occupancy, and depreciation costs as a percentage of sales. What about income generation? Well, there were improvements here as well. From an operating income perspective, operating expense was $1.3 billion, leading to operating income of $355 million, on a margin of 9.3%. Total net income was $274 million, and EPS was a strong $0.72, beating estimates by $0.14. The balance sheet gets better and better, too. There is a growing cash position. The company ended the quarter with cash and cash equivalents of $2.2 billion, up 64% from last year. Free cash flow this year is $540 million. We also like the dividend here and think it's going to be raised. The company paid $57 million in dividends at $0.15 per share. So there is some income here on top of the capital gains. Finally, inventory was down 2% from a year ago, which is a positive move. The company may step up promotions for the holiday but indicated on the conference call that the holiday quarter is off to a very strong start.  As we look ahead, The Gap not only beat against estimates, but it raised its fiscal 2024 outlook once again. It now sees net sales increasing from a year ago 1.5% to 2.0%. Gross margin for the year is now seen expanding 220 basis points. Operating income was increased to now 60% growth for the year. That is impressive. Assuming margins are in the low 40% range and operating income is up 60%, earnings per share for 2024 could hit $2.10. Back in May, we put out a bullish $1.80 forecast. Shares are cheap for this growth. At $24 per share, the stock is still reasonably valued at 11.5X FWD EPS. We believe this stock is set to break out even higher and think pullbacks should be bought.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2486307160"}