Why Gap Stock Is Up 17%

January 3rd, 2025 by Trefis Team
-5.41%
Downside
23.61
Market
22.33
Trefis
GAP: Gap logo
GAP
Gap

Note: Gap’s FY’23 ended on February 3, 2024.

Gap Inc. stock (NYSE: GAP) grew 17% in 2024 compared to a 23% return of the S&P 500 over the same period. In contrast, its peer Guess (NYSE:GES) stock was down 41% in 2024. Also, See What’s Next for Guess’ stock?

So what’s happening with GAP stock?

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Gap experienced a decline in sales momentum over recent years, with revenues decreasing 11% from $16.7 billion in 2021 to $14.9 billion in 2023. However, the company has implemented cost-cutting measures and strategic initiatives, including key executive appointments such as CEO Richard Dickson, to drive sales and earnings growth. Recent results indicate a turnaround, with positive comparable store sales in FY 2024. Following the successful closure of underperforming stores, we expect sales growth to increasingly reflect the company’s strategic transformations. In the first nine months of FY 2024, revenue grew 3% year-over-year to $11 billion, with gross profits also increasing, resulting in improved profitability of $1.70 per share, up from $0.86 per share in the prior year period. The retailer reported a significant expansion of its gross margin, increasing by 350 basis points to 42.2% in the first nine months of FY 2024. This improvement is primarily attributed to the company’s strategic shift toward reduced promotional activity. In part, that is due to management’s resolution of its inventory problem (inventories down 2% y-o-y in Q3 2024). That said, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

While GAP stock has seen lackluster growth over recent years, the Trefis High Quality Portfolio, with a collection of 30 stocks, has provided better returns with less risk versus the benchmark S&P 500 index over the last four year period; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

The apparel industry’s success hinges on consumer spending, which is closely tied to consumer confidence. Although confidence has rebounded from pandemic lows, it still lags pre-Covid levels. The latest U.S. consumer confidence index declined to 104.7 in December after cautious optimism prevailed in October (108.7) and November. For perspective, the consumer confidence index reached 132.6 in February 2020, just before the Covid-19 onset.

We forecast Gap’s Revenues to be $15.1 billion for the fiscal year 2024, up 1.5% y-o-y. We now forecast earnings per share to come in at $2.10. Given the changes to our revenues and EPS forecast, we have revised our Gap’s Valuation to $22 per share, based on a $2.10 expected EPS and a 10.6x P/E multiple for the fiscal year 2024 – almost 7% lower than the current market price (Jan 2).
The company’s comparable sales were up 1% during the third quarter. Segment-wise, Old Navy, which makes up more than half of the company’s revenue, comparable sales were unchanged from last year’s comparison of positive 1%. Gap brand saw a positive 3% comp, and Athleta saw its comp sales grow 5% in Q3 (compared to -19% in Q3 2023).  Banana Republic comp sales fell 1% but that was still better than last year’s 8% decline. Notably, Banana Republic and Athleta brands collectively contribute less than 20% to Gap’s total revenue, highlighting the company’s reliance on its core brands.
In FY 2024, Gap calls for sales up 1.5% to 2.0% compared to a previous estimate of slight growth from $14.9 billion (in FY’23) while delivering a mid-to-high 60% growth range in operating income. It also expects at least a 220 basis point gross margin expansion to around 41%. The company expects Old Navy and Gap brands to continue to perform well in FY’24.
It is helpful to see how its peers stack up. Check out how Gap’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
 Returns Jan 2025
MTD [1]		 Since start
of 2024 [1]		 2017-25
Total [2]
 GAP Return 0% 17% 39%
 S&P 500 Return 0% 23% 163%
 Trefis Reinforced Value Portfolio 0% 16% 748%

[1] Returns as of 1/3/2025
[2] Cumulative total returns since the end of 2016

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