Gap Inc. (GAP) Raises Its Outlook Even As Old Navy Stumbles

Gap Inc. (GAP) announced a revised outlook on August 27, raising its full-year profit and earnings guidance despite a 2% decline in total sales. The company attributed this decision to the strong performance of its Gap brand, which saw a 10% increase in comparable sales, marking its eleventh consecutive quarter of growth. Gap's success was driven by a 3% rise in sales across all categories, including women's, men's, and kids and baby, pushing the brand to fourth place in market share.

Denim and fleece continued to be top sellers, and a Hailey Bieber collaboration boosted sales. Gap Inc. plans to expand beyond apparel, relaunching its fragrance line and introducing accessories starting September. Store remodels are outperforming, with nearly a quarter of North American specialty stores upgraded by year-end. Banana Republic reported a fifth straight quarter of positive comparable sales at 3% growth under new CEO Donald Kohler.

Old Navy, however, experienced a 4% decline in comparable sales due to a misjudged women's summer assortment, with management attributing the loss to poor marketing. CEO Richard Dickson admitted that the marketing shortfall was a bigger surprise than the sales decline. Despite these challenges, Gap Inc. raised its adjusted operating margin outlook to 7.4% to 7.6% and increased adjusted earnings per share guidance to $2.35 to $2.45, driven by a 20 basis point gross margin gain and nearly $600 million in year-to-date buybacks.

Old Navy's CEO, Michael Francis, will take over in November, while Athleta remains the weaker brand, with a 12% decline in comparable sales. Overall, adjusted operating margin fell by 70 basis points year-over-year as SG&A expenses declined from growth investments. Inventory units increased by 4%, attributed to supply chain disruptions.

Hedge fund ownership rose to 36 funds from 31, suggesting institutional investors were adding to their positions. The stock trades at a forward price-to-earnings ratio of 8.29, indicating that the market does not expect continued growth from the Gap brand. While Gap Inc. possesses potential, analysts believe other AI stocks may offer greater upside and less risk.