Gap’s Turnaround Effort Shows Some Signs Of Success

It’s probably a bit premature to say that the Gap is back, but its latest earnings results give at least some indication that signs of life are returning to the long-embattled chain. And that was enough to make investors pretty happy: Gap stocks shot up 9 percent in after-hours trading, as the retailer managed to both outpace expectations and raise its yearly outlook.

“We continue to make progress against the balanced growth strategy we outlined in September, driving efficiency at our more mature brands, while growing our footprint in the value and active space and investing in our online and mobile experience,” Chief Executive Art Peck said in a statement.

By the Numbers

Gap’s earnings came in at $0.58 cents per share for 3Q, comfortably ahead of Wall Street analyst predictions of $0.54. Sales were also on the increase — slightly: up 1 percent to $3.84 billion, as opposed to the $3.80 billion a year ago. Analysts weren’t expecting to see any year-over-year growth and were looking for sales of $3.76 billion.

The Gap saw same-store sales climb in Q3, up 3 percent. That’s well ahead of the 1 percent analysts were looking for and seems to have been driven largely by strength in the Gap’s Old Navy and Athleta lines. Broken down by sales, Old Navy saw same-store sales up 4 percent, the Gap brand notched a 1 percent increase and Banana Republic (the brand that’s struggling the most) saw its comparable sales fall 1 percent.

Those numbers are a turnaround from a year ago, when Gap’s in-store sales fell 1 percent, as the strength at Old Navy was not able to balance out the simultaneous declines of Banana Republic and Gap. But 2017 saw a lot of changes: the retailer attempted to climb out of the hole they’ve spend the last few years in, which means inventory is better controlled and stores that aren’t profitable are shuttered.

Those closures are looking to have a salutary effect on Gap’s bottom line performance. The brand noted that their goal is to save around $500 million in expenses over the next three years.

The Bigger Takeaway

The conventional wisdom on Gap and Gap Brands for the last several years has been mostly dark: a mall brand trying to hold on in the post-mall era. The retailer looked like a brand whose potential for growth had come to a close. The murmurings that it should just give up the ghost and start a new retail life as a store in Amazon’s marketplace got fairly loud.

However, as of this year, that opinion has started to shift. In September, Jefferies Analyst Randal Konik said in an investor note that Wall Street had largely underestimated Gap’s growth potential and, as a result, undervalued the company.  Konik stated that unlike the rest of the brand, Old Navy’s fleet of stores are often detached from malls and thus detached from their falling fortunes.

Moreover, he said, Athleta has proven to be quite a powerhouse, such that Konik noted it could well turn out to be a “share gainer in an attractive athletic apparel category.”

Gap, clearly, has noticed this trend as well, as Gap, Inc. has been shifting its focus to the “growth brands,” so as to better follow consumer trends.

It seems hopeful that strategy will yield stronger results, particularly going forward into the highly competitive holiday season.

But Gap has momentum enough that it has increased its earnings outlook for the make-or-break quarter to come: It expects adjusted earnings per share to fall within a range of $2.08 to $2.12. Previously, Gap was calling for fiscal 2017 earnings of between $2.02 and $2.10 a share.

As of stock market close yesterday, Gap shares climbed more than 22 percent in 2017.