Gap Surprises With Early Q2 Earnings, Raises Annual Margin Outlook

Gap, Inc.’s GAP shares soar as the retailer exceeds second-quarter expectations and ramps up its FY24 margin outlook with a standout performance across key metrics.

The company reported second-quarter earnings per share of 54 cents, beating the analyst consensus of 40 cents. Quarterly sales of $3.72 billion (+5%), beating the street view of $3.63 billion.

The retailer’s quarterly report was unexpectedly posted on its investor relations website hours before schedule. Initially set to report after the markets closed today, the company surprisingly released its results earlier.

Comparable sales increased by 3%, driven by strong Old Navy and Gap performances. The operating margin improved by 490 basis points to 7.9% compared to the previous year.

Store sales surged by 4% year-over-year as the company expanded its footprint to 3,568 locations in nearly 40 countries, with 2,541 under direct operation. Meanwhile, online sales spiked 7% and now comprise 33% of total net sales.

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The gross margin soared to 42.6%, up 500 basis points from last year. A 410-basis-point increase in merchandise margin fueled this boost, thanks to lower commodity costs, higher sales linked to the revenue-sharing deal with the credit card partner, and enhanced promotional efforts.

“In comparison to where we were only one year ago, we are in a stronger position across key metrics that matter – including net sales, margins, and our cash position – and we are making consistent progress in the reinvigoration of our brands,” said President and Chief Executive Officer, Richard Dickson.

Gap ended the quarter with $2.1 billion in cash, cash equivalents, and short-term investments, marking a 59% increase year-over-year.

Operating cash flow was $579 million, with free cash flow of $397 million after accounting for capital expenditures. Ending inventory stood at $2.11 billion, a 5% decrease from the previous year.

Outlook:  The company reaffirmed its net sales and operating expense outlook for fiscal 2024 and increased its outlook for gross margin and operating income growth compared to prior expectations.

Gap now expects gross margin improvement of 200 basis points, up from the previous forecast of 150 basis points, and operating income growth in the mid-to-high 50% range, an increase from the prior mid-40% growth projection.

For the third quarter, the company projects a gross margin expansion of 50 bps to 75 bps (prior year: 41.3%) and expects net sales to increase slightly year-over-year.

Price Action: GAP shares are trading higher by 2.54% to $23.00 at last check Thursday.

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