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Is Gap’s Jump Justified? Yes, and There’s More to Come

Gap store logo sign

Having slid 30% from March through April, investors of Gap Inc (NYSE: GPS) would have been getting nervous. The fact that the retailer had earnings due at the end of May would only have added to this, as that kind of price action in the weeks before a report is often indicative of the smart money positioning itself accordingly.

So when shares of Gap popped almost 50% in the aftermath of their fiscal Q1 results, everyone was surprised. While some of that initial enthusiasm has been reined in, the stock is, for the most part, holding on to the gains, and is even looking ready to add to them. 

How was the market pricing Gap so wrong in the weeks before the earnings, and were their results really good enough to justify these kinds of rapid double-digit gains? Let’s jump in and take a look at a few of the reasons behind it. 

Gap Exceeds Analyst Expectations with Strong Earnings

For starters, the well-known apparel brand smashed analyst expectations for both its top-line revenue and bottom-line earnings. The latter figure, in particular, raised some eyebrows, coming in at $0.41 as it did, which was nearly 200% higher than the consensus. This helped drive a net income figure of $158 million for the quarter, which compared well to last year's $18 million figure. The company’s margins were strong, and for the first time in years, all four of the group’s top brands delivered positive comparable sales. 

The results were so good that management took the opportunity to raise its own forward guidance. While strong results from a past quarter are nearly always good for a stock, issuing better-than-expected guidance about future quarters is the real needle mover. 

As CEO Richard Dickson said in the release, “We’re feeling very confident about our quarter, and it has given us the confidence to raise our guidance for the full year 2024, both the outlook for revenue and operating margin.” Gap is also expecting its operating income to deliver growth in the mid-40% range versus the previously expected low-to-mid teens level.

Gap's Strong Earnings Fuel Immediate Rally

With those kinds of results under their belt and that kind of optimistic outlook coming from the very top, it’s perhaps no surprise that shares of Gap have exploded. Including the 5% they gained the day before the release, they were up 50% within four sessions. This wiped out all the losses from April and May and put Gap shares at their highest levels since August 2021. 

After some initial profit-taking took the steam out of the charge, they’ve logged two green days in a row and are likely to go again. They closed Tuesday’s session at just under $27 a share, which bodes well for those on the sidelines. Looking at some of the analyst upgrades and price targets that have come out in recent weeks, Gap could easily have another 20% in it. 

The team at Barclays, for example, reiterated their Overweight rating on Gap shares in the aftermath of the report while boosting their price target to $31. Evercore ISI did the same, only with a $32 price target. Technically, the case for further upside is also supported.

The post-pop profit taking ran out of steam around the $25 mark on Monday, which is just above where the stock had gapped up to after the results. For readers thinking about getting involved, there’s a good amount of confidence that comes with finding an entry with solid technical support behind it and a lot of room for the upside ahead of it.

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