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Here's Why You Should Add Gap (GPS) Stock to Your Portfolio

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The Gap Inc. (GPS - Free Report) has been gaining from the revived trends in the apparel industry, driven by the lifting of the pandemic-led restrictions and government stimulus payments, which have resulted in increased traffic in stores. Customers are now venturing out to stores for their purchases, which have been boosting in-store sales.

Additionally, retailers are benefiting from the continued momentum in the online business. Gains from these trends are not only reflected in Gap’s stock performance but also significantly boosted first-quarter fiscal 2021 results.

The company reported better-than-expected top and bottom-line numbers for first-quarter fiscal 2021. Also, its earnings and sales improved year over year. Moreover, it reported strong growth in key metrics on a two-year basis (compared with first-quarter fiscal 2019), reflecting robust growth from the pre-pandemic levels.

Notably, earnings per share of 48 cents improved substantially from a loss of $2.51 in the year-ago quarter and adjusted earnings of 24 cents reported in first-quarter fiscal 2019. Net sales improved 89% year over year and 8% from the 2019 pre-COVID levels to $3,991 million.

In the past 30 days, the company’s estimates for fiscal 2021 and 2022 earnings per share have moved up 26.5% and 10.9%, respectively. For fiscal 2021, its earnings estimates are pegged at $1.67 per share, suggesting a rise of 179.2% from the year-ago reported figure.

In the past three months, shares of the Zacks Rank #1 (Stock Buy) company have gained 6.9% compared with the industry’s growth of 2.8%.

 

Zacks Investment ResearchImage Source: Zacks Investment Research


Now let us discuss at length what makes the leading apparel retailer an investor favorite.

Gap has been benefiting from strength in its Old Navy and Athleta brands, growth in the Gap business in North America, and market share gains. Its powerhouse brand, Old Navy, which is focused on creating affordable high-quality fashion for the whole family, remains a significant long-term growth driver for the company. Notably, the Old Navy brand has been witnessing a significant acceleration in the digital business on the back of robust customer demand as well as relevant digital marketing investments.

Additionally, Gap has been experiencing significant progress in its smaller brands. Notably, the Athleta brand’s value-driven active and lifestyle categories, increased digital marketing investments, and focus on product strategy have been aiding sales.

In first-quarter fiscal 2021, net sales improved 27% and 56% for the Old Navy and Athleta brands, respectively, from the pre-pandemic levels. Comps at Old Navy Global and Athleta increased 25% and 46%, respectively, from the 2019 comparable period. On a year-over-year basis, comps improved 29%, 35% and 27%, respectively, at Gap, Old Navy and Athleta brands, while it was down 4% for Banana Republic.

At the Old Navy brand, sales gains were attributed to the continued momentum in casual and cozy categories, with sturdy performance in active and fleece. Also, it witnessed a rebound in seasonal categories as consumers move to the pandemic recovery phase, planning vacations and summer activities.

Athleta reported exorbitant digital growth, which increased 113% from the first-quarter fiscal 2019 levels. Growth was driven by robust regular-priced sales, led by gains in relevant categories and purpose-led marketing. It also benefited from the launch of inclusive sizing and the partnership with Simone Biles in the reported quarter.

The company remains on track with the execution of its Power Plan 2023, which focuses on opening highly profitable Old Navy and Athleta stores, while closing the underperforming Gap and Banana Republic stores. As part of the plan, the company expects the Old Navy and Athleta brands to contribute about 70% to sales by 2023. In sync with its fleet-optimization efforts under its Power Plan 2023 strategy, it plans to close about 100 Gap and Banana Republic stores globally, net of openings, in fiscal 2021.

Additionally, Gap has been recording significant growth in its scaled digital business since the onset of the pandemic, driven by a shift in consumer preference toward online shopping. Despite the opening of stores, the company continued to witness strength in the online business, with digital sales increasing 61% year over year and 82% from the first quarter of fiscal 2019. Notably, digital business contributed 40% of total sales in the reported quarter. Continued growth in the e-commerce business contributed significantly to the company’s consolidated sales as well as gains in its Gap, Old Navy and Athleta brands.

As part of its Power Plan 2023, the company expects to leverage its powerful platform to deliver competitive omni capabilities to meet customers’ needs, all fueled by its scaled operations. It expects the e-commerce business to contribute 50% of sales by the end of 2023.

Backed by a strong start to fiscal 2021, led by robust sales growth and operating margin expansion relative to first-quarter fiscal 2019, Gap raised its view for fiscal 2021. It now envisions adjusted earnings of $1.60-$1.75 per share compared with $1.2-$1.35 mentioned earlier. GAAP earnings per share are now expected to be $1.55-$1.70. The company expects year-over-year sales growth in the low-to-mid 20% compared with mid- to high-teens stated earlier.

Moreover, the company expects reported and adjusted operating margin of 6%, up from 5% mentioned earlier. The updated view is driven by strong fiscal first-quarter performance and Gap’s progress on achieving its targeted 10% operating margin rate by 2023, in sync with its Power Plan 2023.

Conclusion

Backed by the strong business momentum, strength in Old Navy and Athleta brands, and the progress on its Power Plan 2023; we expect the company to retain its business momentum in the near term.

Other Retail Stocks to Watch

Tillys, Inc. (TLYS - Free Report) has a long-term earnings growth rate of 10%. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Abercrombie & Fitch Company (ANF - Free Report) has an expected long-term earnings growth rate of 18%. It currently sports a Zacks Rank #1.

The Children’s Place, Inc. (PLCE - Free Report) , also a Zacks Rank #1 stock, has a long-term earnings growth rate of 8%.

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