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Gap (NYSE:GPS) stock is trading over 8% higher pre-market after the retailer reported stronger-than-expected earnings per share for the third quarter.
Gap posted an adjusted EPS of $0.71, which includes $0.33 income from tax benefits, to crush the consensus expecting flat earnings. Revenue came in at $4.04 billion, again better than the $3.81B consensus.
Gap also said that its comparable sales grew 1% year-over-year while online sales were up 5% YoY, now representing 39% of total revenue.
“While our third quarter results underscore the initial progress we are making toward rebalancing our assortments and reducing inventories, we continue to take a prudent approach in light of the uncertain consumer and increasingly promotional environment as we look to the remainder of fiscal 2022,” said Katrina O’Connell, Executive Vice President, and Chief Financial Officer of Gap.
For the fourth quarter, Gap sees net sales declining mid-single digits YoY.
“We have sharpened our focus on execution to optimize profitability and cash flow, are bringing more rigor to our operations, and balancing our assortments in response to what our customers are telling us,” the company further stated.
Jefferies analysts see improved execution after Gap posted “a sizeable beat.” The analysts raised the price target by $2 per share to $13.
“Long-term, we believe a mix shift toward Old Navy and Athleta should improve the company’s margin structure. However, we think there are still risks around Old Navy maintaining its historical growth and margin rates, especially with growing competition. We believe slowing trends at Old Navy (drives ~60% of revenue and even more of profit) will be a key focus among investors near-term. While Athleta is a strong, growing brand, it is not large enough to drive the investment case at this time, in our view,” they said in a client note.
Goldman Sachs analysts also see “early signs of improvement,” but remain Neutral-rated on GPS stock.
“We step away from the quarter encouraged by the stronger comp trends across brands on both a 1-yr and 3-yr stack,” they wrote to clients.
