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Gap Shares Surge 21% on Raised Guidance, Q1 Earnings Beat

Gap Inc. (NYSE: GPS) witnessed a remarkable surge in its shares by 21% subsequent to the disclosure of its first-quarter financial outcomes, which outpaced analyst projections and prompted an upward revision of its annual guidance. The enthusiastic market reaction was propelled by the retailer’s robust earnings and its optimistic forecast for the future.

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For the quarter concluding on May 4, 2024, Gap reported a substantial rise in earnings per share (EPS) to $0.41, notably surpassing the analyst consensus of $0.14. Additionally, the company’s revenue surpassed expectations, reaching $3.4 billion compared to the anticipated $3.28 billion.

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This translated to a 3% increase in net sales compared to the corresponding quarter of the previous year, with comparable sales also climbing by 3% year-over-year (YoY).

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Richard Dickson, President and CEO of Gap, lauded the results, stating, “Gap Inc. delivered a strong quarter that exceeded expectations across key metrics.” He attributed the achievement to the company’s consistent market share gains over five consecutive quarters and favorable comparable sales across all its brands. Demonstrating confidence in the company’s trajectory, Dickson announced an upward revision of sales and operating income guidance for the fiscal year.

Gap’s solid performance was evident across its brand portfolio, with Old Navy and Athleta exhibiting particularly robust comparable sales growth of 3% and 5%, respectively. The Gap brand maintained its positive momentum with a 3% increase in comparable sales, while Banana Republic also experienced improvement with a 1% rise.

The company’s gross margin witnessed significant improvement, marking a 410 basis point increase over the previous year’s figures. This improvement was primarily attributed to lower commodity costs, which bolstered merchandise margin by 340 basis points on a reported basis. Gap reported an operating income of $205 million for the quarter, with an operating margin of 6.1%.

In light of these encouraging results, Gap revised its fiscal 2024 outlook upwards, anticipating higher net sales and a more substantial increase in operating income growth compared to previous estimates.

Following the release of the report, analysts at Evercore ISI reiterated their Buy rating on GPS stock and raised the target price from $24 to $32.

“We’re highly encouraged to see total GPS comp +3% in the quarter. More importantly, we’re particularly surprised that all 4 divisions comped positive in the quarter,” stated Evercore analysts. “With accelerations at ON, BR, and Athleta comps, and a proven ability to find efficiencies in the operating model, we see increased visibility to the upside power in GPS’ model.”

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