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Gap Stock Surges as Summer Powers Earnings Beat, Back-to-School Boosts Forecasts

'Our customers embraced summer with optimism, hungry for mood-boosting clothes, and vacations and reunions became reality,' says CEO Sonia Syngal.

Gap Inc.  (GPS) - Get Gap, Inc. (GPS) Report shares surged higher Friday after the multi-brand apparel retailer posted stronger-than-expected second quarter earnings, and boosted its 2021 profit forecasts, thanks to solid summer traffic and the first 'back to school' push in two years. 

Gap said it sees net sales rising 30% this year, up from its prior forecast of a 20% jump, with adjusted profits in the range of $2.10 and $2.25 per share, a significant boost from its spring estimate of $1.60 to $1.75. 

Second quarter sales, in fact, were the highest in more than a decade, rising 29% to $4.2 billion, while its quarterly operating margin was pegged at 9.7% 

Marketing costs, incentives and supply chain issues will pressure second half margins, but the Banana Republic, Athleta, Old Navy and Gap owner said its ahead of its track to reach 10% by 2023. 

"Looking ahead, we've prepared for back to school. Our kids and baby business has been a point of strength at both Old Navy and Gap. And between the two brands, we represent 9% of the market," CEO Sonia Syngal told investors on a conference call late Thursday. "That said, we are clear-eyed about the fluid ecosystem we operate within. From inflation to wage pressures or the recent surge in the delta variant, the teams are mitigating supply chains headwinds from closures in the countries where we source and makes our clothes and delays due to poor convection and transportation challenges."

"Thanks to the speed and scale of our omnichannel business, deep supplier relationships, and the playbook we've built at the start of the pandemic, we are advantaged here," she added. "We are stronger. We're healthier. We're faster. And we're more focused Gap Inc. than we were a year ago."

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Gap shares were marked 7.2% higher in pre-market trading Friday to indicate an opening bell price of $28.25 each, a move that would extend the stock's year-to-date gain to around 40%.

Gap's numbers come amid a series of of stronger-than-expected July quarter updates from brick-and-mortar retailers such as Best Buy  (BBY) - Get Best Buy Co., Inc. Report, Foot Locker  (FL) - Get Foot Locker, Inc. Report, Macy's  (M) - Get Macy's Inc Report and Kohl's  (KSS) - Get Kohl's Corporation (KSS) Report, all of which notched solid same-store sales growth and bullish near-term forecasts.

Discount retailers like Dollar Tree  (DLTR) - Get Dollar Tree, Inc. Report and Dollar General  (DG) - Get Dollar General Corporation Report, however, noted that higher near-term shipping costs and COVID uncertainty would hold back gains over the second half of the year. 

The Commerce Department's July report on U.S. retail sales showed a bigger-than-expected 1.1% decline from the previous month, but also noted that clothing and clothing accessories sales were up 43.4% from last year to around $17.8 billion. 

"While most retailers are guiding to second half sales decelerations, Gap guidance implies a second half sales acceleration to +12% vs (the second half of 2019) compared to +6% in (the first half of this year)," said Credit Suisse analyst Michael Binetti, who carries a neutral rating on the stock with a $31 price target. 

"While the first back to school in 2-years is a big driver (though BTS planned to start later than normal), Old Navy’s inclusive sizes 'BODEQUALITY' launch is the biggest input to the 2H acceleration— with Gap calling it the biggest launch in brand history," he added.