The Gap stock rises after earnings: is it a good buy?

The Gap (GAP) is a popular American brand that owns its eponymous brand and other companies like Old Navy, Banana Republic, and Athleta, a top athleisure brand. It has over 2,562 stores and 998 franchises in the US and other countries. 

The Gap’s business has been under pressure in the past few years as retail spending has struggled because of high interest rates. As a result, its annual sales dropped from $15.6 billion in 2022 to $14.8 billion last year. 

Nonetheless, its stock has jumped by over 264% from its lowest point in 2023 as the company took measures to improve its profitability. Its annual profit jumped to over $502 million last year and $823 million in the trailing twelve months.

The stock has also done well as the company continued to gain market share in the industry. Most recently, it gained share for seven consecutive quarters. 

The Gap stock was trading at $24.87 after rising by over 12% on Friday last week, following strong financial results. Its HypeIndex figure has jumped to 157%.

Positive hype

• The Gap’s hype has increased after it published strong financial results, signaling that the management’s turnaround efforts were working. 

• Its financial results showed that its net sales rose by 2% in the last quarter to $3.8 billion, while its same store sales rose by 1%. 

• Gap is also growing its margins, with the gross profit margin rising by 140 basis points to 42.7%. Its operating margin rose to 9.3%.

• All its brands saw positive growth during the quarter. Most of this growth came from Athleta, a company that competes with Lululemon Athletica, whose sales grew by 4%. Banana Republic, Gap, and Old Navy sales grew by over 1%.

• The Gap has also managed its inventory well, with its ending inventory falling by 2% compared to last year. A lower inventory figure is seen as a profitable thing for a company. 

• The Gap has also improved its balance sheet and increased its shareholder returns. Its cash and short-term investments rose to $2.2 billion, a 64% increase from a year earlier. 

• The company returned $164 million to shareholders through dividends. 

• Management expects that its business will continue doing well this year. It expects that its sales will grow by between 1.5% and 2.0%. Its gross margins are expected to increase to 220 bps.

• These numbers mean that the management’s turnaround is taking shape. Analysts believe that the stock will rise to $28.50, up from the current $24.8.

• The Gap is fairly undervalued as its forward price-to-earnings ratio stands at 12.4, lower than the sector median of 19.3.

Negative hype

• The Gap’s business could face challenges as the athleisure industry slows down as evidenced by the drop of the Lululemon stock.

• There are signs that the Gap’s stock has formed a head and shoulders chart pattern, which is a popular bearish sign.

The Gap stock analysis

On the daily chart, we see that the Gap share price has been in a rebound in the past few days. It has moved above the ascending trendline that connects the lowest swing since January 2024. 

The stock has moved above the 50-day and 200-day Exponential Moving Averages (EMA). It has moved above the 23.6% Fibonacci Retracement level. 

The risk, however, is that the stock has formed a hanging man candlestick pattern, a popular reversal sign. It has also formed a hammer candlestick pattern.

Therefore, the outlook for the stock is relatively bearish sign, with the next point to watch being at $20, the lower side of the ascending channel.

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HypeIndex is an AI platform that detects Hype in stocks and cryptos before it moves the market, providing reliable early detection for profitable investment opportunities.

The algorithm for our proprietary HypeIndex score is based on sentiment analysis, data science and machine learning.