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Here's Why Gap (GPS) Stock Appears a Promising Bet Now

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The Gap, Inc. (GPS - Free Report) stock is well-poised to tap the positive trends in the fashion arena, thanks to its robust strategic initiatives. The company has been gaining from brand strength and solid demand for its products that resonate well with customers.

Buoyed by such strengths, shares of this clothing and accessories retailer have gained 23.2% compared with the industry’s 16.4% growth in the past six months. A VGM Score of A further adds strength to this Zacks Rank #1 (Strong Buy) company.

Let’s Delve Deeper

Gap is aggressively undertaking cost-control actions. The company has been simplifying and optimizing its operating model and structure, including increasing spans of control and decreasing management levels, to improve the quality and speed of decision-making. It is also creating a consistent organizational structure across its brands. Gap is focused on actioning more than $550 million in annualized cost savings and realizing margin expansion on lower air costs, improved discounting and effective sourcing strategies.

The company has been gaining from lower airfreight and improved promotional activity. This has been aiding the company’s margins and, in turn, the overall profitability. During first-quarter fiscal 2024, the gross margin expanded 400 basis points (bps) year over year. The merchandise margin also grew 330 bps, benefiting from lower commodity costs. Rent, occupancy and depreciation, as a rate of sales, leveraged 70 bps year over year.

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Management is committed to creating a trend-right merchandise assortment, deepening relations with customers via marketing, enhancing the digital commerce agenda and efficiently controlling expenses. Gap’s sturdy execution of its Power Plan 2023 Strategy, which is focused on opening highly profitable Old Navy and Athleta stores while closing the underperforming Gap and Banana Republic stores, has also been contributing to its results.

Such efforts have helped the company post robust fiscal first-quarter results, wherein both the top and bottom lines beat the Zacks Consensus Estimate and increased year over year. Both comparable sales and store sales rose 3% year over year. Online sales grew 5% year over year, accounting for 38% of the total sales. The majority of the company’s brands performed well in the fiscal first quarter. Net sales at Old Navy Global increased 5% year over year while the metric rose 2% each at Banana Republic and Athleta. Net sales remained flat year over year at Gap Global.

Going forward, management anticipates commodity cost tailwinds in the first half of the fiscal year that are likely to become largely neutral in the second half, resulting in approximately 100 bps of gross margin leverage for the full year. For fiscal 2024, it now projects sales to grow slightly year over year on a 52-week basis compared with flat sales predicted earlier. The company expects gross margin expansion of at least 150 bps. It also anticipates operating income to grow in the mid-40% range.

The Zacks Consensus Estimate for GPS’ fiscal 2024 sales and earnings per share is pegged at $14.92 billion and $1.74, respectively, indicating growth of 0.2% and 21.7% year over year. This highlights analysts’ confidence in the stock. Given all the positives, Gap stock seems to deserve a place in your investment portfolio.

Other Key Picks

Below, we have highlighted three other top-ranked stocks, namely Abercrombie (ANF - Free Report) , DICK'S Sporting (DKS - Free Report) and Tractor Supply (TSCO - Free Report) .

Abercrombie, a leading apparel retailer, currently sports a Zacks Rank of 1. ANF delivered an average earnings surprise of 210.3% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Abercrombie’s current financial-year sales implies growth of 10.4% from the year-ago reported figure.

DICK'S Sporting, a sporting goods retailer, currently carries a Zacks Rank #2 (Buy). DKS delivered an average earnings surprise of 4.7% in the trailing four quarters.

The consensus estimate for DICK'S Sporting’s current financial-year sales indicates growth of 1.8% from the year-ago reported figure.

Tractor Supply, the largest retail farm and ranch store chain in the United States, currently carries a Zacks Rank of 2. TSCO delivered an average earnings surprise of 2.7% in the trailing four quarters.

The Zacks Consensus Estimate for Tractor Supply’s current financial-year sales indicates growth of 3% from the year-ago reported figure.

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