Apparel Retailer Gap Tops Q4 Earnings Estimates; Forecasts Sales Growth in 2021

San Francisco, California-based apparel retailer Gap Inc reported better-than-expected earnings in the fourth quarter and said it expects this year’s sales to reflect mid-to high-teens growth versus last year, sending its shares up over 4% in extended trading on Thursday.

The U.S. specialty apparel retailer said its comparable sales were flat in the quarter, including a 49% increase in online sales and total net sales fell 5% due to store closures and COVID-19 impacts. Store sales declined by 28% in the quarter, with impacts from the pandemic and strategic closures noted above.

Gap reported earnings per share of 28 cents, 9 cents more than Wall Street’s expectations. For the fiscal year 2021, the company expects diluted earnings per share to be in the range of $1.20 to $1.35.

Following this optimism, Gap shares, which surged over 14% in 2020, rose over 4% to $25.42 in after-trading hours on Thursday.

“4Q was mixed – with signs of the company’s Power Plan taking hold in the form of significant occupancy leverage, lower markdowns, and a better trend at the core Gap brand, offset by a moderating trend at Old Navy.  Margin enhancing initiatives are encouraging, but we look for greater clarity around Old Navy, which remains the key profit driver for GPS. Reiterate Hold,” said Janine Stichter, equity analyst at Jefferies.

Gap Stock Price Forecast

Five analysts who offered stock ratings for Gap in the last three months forecast the average price in 12 months of $25.40 with a high forecast of $28.00 and a low forecast of $22.00.

The average price target represents a 0.08% increase from the last price of $25.38. From those five analysts, one rated “Buy”, four rated “Hold” while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $29 with a high of $42 under a bull scenario and $14 under the worst-case scenario. The firm gave an “Equal-weight” rating on the apparel retail company’s stock.

“4Q GM expansion & controlled SG&A spend bring the 10% EBIT margin target back into view. But management must deliver sales acceleration for positive EPS revisions, the key unlock to further stock price appreciation given high valuation. Raise price target to $29; stay Equal-weight as we await signs of revenue acceleration,” said Kimberly C Greenberger, equity analyst at Morgan Stanley.

Several other analysts have also updated their stock outlook. JP Morgan raised the target price to $32 from $30. RBC upped the price objective to $30 from $28. B Riley increased the stock price forecast to $27 from $22. Jefferies raised the price target to $25 from $24. UBS upped the target price to $25 from $22.

Analyst Comments

“GPS is in need of significant transformation. However, we are more positive on the LT forecast given new management’s commitment to fleet and corporate downsizing. The separation work and COVID-19 were the catalysts GPS needed to downsize its business, as reflected by management’s comprehensive plan for the business outlined at its 2020 Investor Day,” said Morgan Stanley’s Greenberger added.

“Our fundamental concerns remain (falling store traffic, eComm disintermediation, declining brand health, apparel price deflation, falling margins), but are exacerbated in the NT due to COVID-19. A portion of GPS‘ portfolio value proposition is less competitive, as Gap brand and BR require significant transformation; ON and Athleta are bright spots.”

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