Gap's Growth Drivers: Market Share Gains, Brand Momentum, And Raised Guidance – Analysts Weigh In

Wall Street analysts rerated Gap, Inc GAP after the company reported upbeat third-quarter print Thursday.

The company reported sales of $3.829 billion, beating analyst consensus of $3.812 billion. Earnings per share of 72 cents topped analyst estimates of 57 cents.

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It now expects fiscal 2024 revenue of $15.124 billion – $15.198 billion, above the consensus of $14.956 billion.

BMO Capital analyst Simeon Siegel maintained Gap with a Market Perform and raised the price target from $23 to $25.

Telsey Advisory Group analyst Dana Telsey reiterated Gap with a Market Perform and a $26 price target.

BofA Securities analyst Lorraine Hutchinson maintained Gap with a Neutral and raised the price target from $25 to $28.

Guggenheim analyst Robert Drbul reiterated a Buy rating on Gap with a price target of $35.

BMO Capital: Gap reported third-quarter EPS that significantly exceeded expectations, with sales slightly surpassing estimates.

Key drivers included robust gross margin improvement, supported by more substantial merchandise margins and ROD leverage. Banana Republic, Gap, and Athleta exceeded expectations, while Old Navy met projections despite weather-related challenges. Management highlighted market share gains across all brands and raised its guidance for full-year sales, gross margin, and EBIT growth.

Old Navy sales were flat year-over-year, marking a moderation from prior quarters but maintaining momentum. Unseasonably warm weather impacted the performance of children’s apparel, but sales rebounded as weather patterns normalized.

Gap Brand delivered its fourth consecutive quarter of positive comparable sales, growing 3% year-over-year, driven by strong product and marketing execution.

Banana Republic experienced 2% year-over-year growth, with continued emphasis on improving fundamentals and success in the men’s category.

Athleta achieved its most robust growth in two years, with sales increasing 4% year-over-year. New product launches and marketing resonated with customers, driving share gains.

Gap’s gross margin reached 42.7%, exceeding the Street’s 42.1% estimate, with a 140-basis-point year-over-year expansion. 90-basis-point merchandise margin growth and operating leverage were key contributors. However, fourth-quarter gross margins are expected to remain flat when adjusted for ROD deleverage from calendar shifts.

Telsey Advisory Group: Telsey provided a detailed assessment of Gap following its third-quarter earnings report. The company exceeded expectations across multiple metrics, reflecting strong operational discipline under its new leadership.

Gap has demonstrated clear progress under its strategic focus on operational discipline, inventory efficiency, and brand portfolio growth. However, the analyst cautions that sustained consistency in performance and long-term profitability will be critical for investor confidence. The positive momentum in sales and profitability efforts suggests Gap is stabilizing its business and positioning itself for future growth.

The price target is based on an 11.5x multiple of the two-year forward EPS estimate of $2.26. While this valuation is slightly below Gap’s historical average of 13.1x, it reflects the company’s ongoing challenges in a competitive retail environment.

BofA Securities: Hutchinson highlighted its sales and margin performance while cautioning about future margin expansion.

Gap delivered adjusted EPS of $0.72, outperforming Hutchinson’s estimate of $0.54 and the consensus projection of $0.57. The beat was supported by 1.6% sales growth, gross margin improvement, and effective SG&A management. Comps were positive at Athleta (+5%) and Gap (+3%). Management raised its fiscal 2024 guidance, reflecting the third-quarter outperformance.

Hutchinson raised fiscal 2024 and fiscal 2025 EPS estimates by 9% and 5%, respectively, projecting $1.97 and $1.99. The analyst increased the price target to $28, based on a 6x 2025 estimated EV/EBITDA.

Management raised its fiscal 2024 guidance for sales, gross margin, and operating income. Hutchinson expects gross margin to improve by 350 basis points compared to 2019, driven by reduced promotions and more vital full-price selling.

However, Hutchinson highlighted that while Gap has achieved significant cost savings, management may prioritize reinvesting efficiencies into growth initiatives and inflation offsets rather than improving the bottom line.

Hutchinson’s price target of $28 reflects a 6x 2025 estimated EV/EBITDA, consistent with peer averages. This valuation balances risks tied to Gap’s exposure to low-income consumers and freight costs against its turnaround potential and Athleta’s relatively more robust performance.

While Hutchinson acknowledges the company’s improved sales trajectory, remains cautious on further margin growth.

Guggenheim: Drbul highlighted the company’s earnings beat, strategic progress, and upwardly revised guidance. The quarter marked the company’s fourth consecutive quarter of top-line growth and seventh quarter of market share gains.

Drbul values Gap at 15.2x 2025 EPS, a premium to its five-year average multiple of 12.5x, reflecting confidence in ongoing operational improvements and growth potential.

He highlighted the strength of the Old Navy and Athleta brands as critical drivers, particularly noting Athleta’s position in an attractive apparel segment. With a ~3% dividend yield, Drbul views Gap shares as offering a compelling risk-reward profile supported by significant asset value and strategic optionality.

Drbul’s price target underscores optimism about Gap’s ability to sustain its momentum, deliver margin expansion, and execute its reinvigoration initiatives successfully.

Price Action: GAP stock is up 11.2% at $24.51 at last check Friday.

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