Gap's Turnaround Gains Steam, But is the Stock a Buy?

Shares of specialty apparel company Gap (GAP) jumped about 16% in extended trading following the company’s third-quarter fiscal 2024 earnings report. Gap delivered better-than-expected results and provided upbeat guidance for the holiday quarter, lifting investor sentiment.

A Comeback Story in Progress

Gap faced challenges heading into Q3, including hurricane-related store closures, unseasonably warm weather, and pressure on consumer discretionary spending. Despite these headwinds, Gap’s turnaround strategy has proven effective, driving financial improvement and steady market share growth.

The retailer delivered net sales growth for the fourth consecutive quarter, and its market share expanded for the seventh straight quarter. Additionally, the company significantly expanded its operating margin during Q3, signaling a strong recovery trajectory.

Gap’s Q3 Highlights: Beating Expectations

Gap’s net sales increased 2% year-over-year to $3.83 billion, surpassing analysts' estimates of $3.81 billion. Comparable sales rose 1%, signaling steady demand across its offerings, despite some challenges.

• Old Navy: The largest contributor to Gap's revenue, Old Navy delivered net sales of $2.2 billion, up 1% year-over-year. While comparable sales were flat due to weather-related headwinds, the brand demonstrated strength in men's and women's categories, and gained market share.
• Gap Brand: Net sales reached $899 million, up 1% from last year, with comparable sales jumping 3%. Notably, Q3 marked the fourth consecutive quarter of positive comparable sales growth, reflecting product innovation and marketing efforts.
• Banana Republic: Sales were $469 million, up 2%, though comparable sales dipped 1%. The brand showed encouraging progress in its men's segment.
• Athleta: A standout performer in Q3, Athleta's net sales rose 4% to $290 million, with comparable sales up 5%. This growth signals a significant turnaround for the brand, driven by refreshed products and effective marketing strategies.

Gap achieved a 140 basis-point improvement in gross margin, reflecting disciplined cost management and operational efficiency. Operating margin rose to 9.3%, the company’s highest Q3 margin in seven years, up 270 basis points from the prior year.

This strong margin performance translated into robust earnings growth. Earnings per share (EPS) came in at $0.72, up 22% from the adjusted EPS of $0.59 in the year-ago period, and well above the consensus estimate of $0.58.

Gap’s Q3 performance showed the company’s ability to drive growth, control costs, and strengthen its margins, even amid challenging conditions.

With momentum across key brands, ongoing market share gains, and a focus on operational discipline, Gap appears well-positioned to continue delivering value to shareholders.

Guidance for FY24: A Bright Holiday Ahead

Gap also revised its full-year outlook upward, driven by ongoing business momentum and a strong start to the holiday season.

With a solid year-to-date performance, Gap now anticipates FY24 net sales to grow between 1.5% and 2%, a notable improvement from its earlier guidance of slight growth. Additionally, the company projects its gross margin to expand by 220 basis points, up from the previous guidance of 200 basis points, affirming its ability to manage costs and enhance profitability.

The company’s operating income growth is now expected to be in the mid to high 60% range, compared to the previous mid to high 50% forecast.

Gap Poised for Growth

Gap is driving its turnaround by improving brand clarity, product innovation, and customer experience across its portfolio. At Old Navy, the focus is on dominating the $70 billion activewear market, expanding family-oriented value offerings, and leveraging double-digit growth in its Active segment for sustained momentum.

The Gap brand is focusing on trend-right products, attracting new customers, and driving brand loyalty. Banana Republic is reclaiming its premium lifestyle niche. Men's apparel continues to thrive, while efforts are underway to improve women’s fit and assortment. Further, the brand’s growth will likely be supported by a shift to influencer-driven marketing and remodeled stores in key markets.              

At Athleta, growth has resumed, fueled by improved marketing. Social media traction, particularly on TikTok, is helping attract high-value customers, while refreshed collections and remodeled stores enhance shopper engagement.

On the operational side, Gap is bolstering its supply chain resilience by diversifying sourcing and reducing dependence on China. Overall, these efforts are positioning the company for a strong comeback.

The Bottom Line on GAP Stock

Gap’s consistent sales growth, robust margin expansion, and upwardly revised guidance suggest the company’s turnaround strategy is firmly on track. With the holiday season shaping up to be a strong one, Gap could continue to surprise to the upside.

Wall Street analysts have a “Moderate Buy” consensus rating on Gap stock.