Can Gap (GPS) Continue Its Winning Streak in the Near Term?

·4 min read

Shares of Gap, Inc. GPS have been displaying a decent run on the bourses, rallying 34.1% year to date. This compared favorably with the industry’s and the S&P 500’s growth of 11.2% and 20.5%, respectively, in the said time frame.

The consensus mark for fiscal 2021 earnings has moved up by a penny in the past seven days, reflecting analysts’ optimism about the company’s potential to generate profits. In the said period, its earnings are likely to surge 184.8% year over year.

Let’s delve into the factors that might drive investors’ sentiments and aid it to generate profits in the upcoming earnings season.

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Zacks Investment Research

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A Brief Introspection

The company has been benefiting from strength in its Old Navy and Athleta brands. The Old Navy brand has been witnessing a significant acceleration in the digital business on robust customer demand as well as relevant digital marketing investments. Continued momentum in casual and cozy categories, with a sturdy performance in active and fleece as well as a rebound in seasonal categories, remained key growth drivers.

At the Athleta brand, value-driven active and lifestyle categories, increased digital marketing investments, and focus on product strategy have been aiding sales. Gains in relevant categories, enhanced marketing efforts, better pricing, and the launch of inclusive sizing and partnership with Simone Biles act as upsides for the brand.

It has also been witnessing continued momentum in its digital business, even after store reopening. Solid online show contributed to sales of Gap, Old Navy and Athleta brands. Management remains keen on optimizing its mobile experience as a key priority in 2021. It launched its native Android app in March, which has been gaining traction. Some other notable payment options are PayPal and AfterPay. That said, the company targets the e-commerce business to contribute 50% of sales by the end of 2023.

Gap is progressing well 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 70% of sales by 2023. In sync with its fleet-optimization efforts under the plan, it plans to close 100 Gap and Banana Republic stores globally, net of openings, in fiscal 2021. The store closures are likely to generate $100 million in EBITDA savings on an annualized basis by the end of 2023.

Driven by such well-chalked-out efforts, management raised its fiscal 2021 view. It envisions adjusted earnings of $1.60-$1.75 per share compared with $1.2-$1.35 mentioned earlier. The company expects year-over-year sales growth in the low-to-mid twenty percent range compared with mid- to high-teens stated earlier. The sales guidance includes revenues lost due to the divestitures of Janie and Jack, and Intermix, which are expected to be 2% of annual company sales. Adjusted operating margin is likely to be 6%, up from 5% mentioned earlier.

We are optimistic that Gap’s growth plans will help keep its stellar show on, thus, aiding its earnings results this month. The Zacks Rank #1 (Strong Buy) company, which is set to release second-quarter fiscal 2021 earnings results on Aug 26, boasts an Earnings ESP of +53.66%.

3 Other Stocks to Consider

Crocs CROX currently has an impressive long-term earnings growth rate of 15% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Gildan Activewear GIL has a long-term earnings growth rate of 28%. The company has a Zacks Rank #2 at present.

Whirlpool Corporation WHR has a Zacks Rank #2 and a long-term earnings growth rate of 8.1%.

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