Gap Stock Jumps After Earnings Beat. Why It’s a Buy Into the Holiday Season.

Gap clothing is on display in New York City in April. (Michael M. Santiago/Getty Images)

Key Points

• Gap’s third-quarter revenue increased 3% to $3.9 billion. Comparable sales rose 5%, exceeding estimates.
• Earnings per share reached 62 cents, surpassing the estimated 59 cents, contributing to a 4.2% stock jump.
• The company raised its full-year net sales outlook to 1.7% to 2% growth. It expects an operating margin of approximately 7.2%.

Gap stock jumped ahead of the open Friday following a stronger-than-expected earnings report for the apparel retailer’s fiscal third quarter.

Revenue rose 3% from last year to $3.9 billion in the quarter ended Nov. 1, roughly in line with analysts’ expectations, according to FactSet.

Comparable sales rose 5% from the year-ago quarter, ahead of estimates for a 3% rise. The increase marked the seventh consecutive quarter of positive comparable-sales growth for Gap, said CEO Richard Dickson. Strong comparable-sales growth for the Old Navy, Gap, and Banana Republic brands was slightly offset by an 11% decline at Athleta.

Profit was better than expected as well. Earnings per share came in at 62 cents, topping estimates for 59 cents, when the retailer released results after the close Thursday.

Shares of Gap were up 2.9% in premarket trading. The stock is off 2.4% this year through Thursday’s close.

Jefferies analyst Corey Tarlowe said the report showed Gap “remains well-positioned for success,” as he noted the stock was a Buy post results and into the holiday season, in a note Friday. He upgraded the stock to a Buy rating last week.

“Under the leadership of CEO Richard Dickson, the company is executing a clear strategy to reinvigorate its brands and drive profitable growth. Additionally, we see beauty as a high-margin opportunity that could provide meaningful top- and bottom-line upside over time,” he added.

“The strength of our third quarter and quarter-to-date performance positions us well for the holiday selling season and gives us the confidence to increase our full year net sales outlook to the high end of our prior guidance range,” Dickson said.

The company now expects net sales for the fiscal year to increase between 1.7% and 2% from a year ago. Management’s prior forecast was for growth between 1% and 2%.

Gap also said it expects an operating margin of approximately 7.2%, up from its prior range of 6.7% to 7%. This includes a drag of roughly one percentage point tied to tariffs that was also factored into the previous outlook, the company said.

Write to Sabrina Escobar at sabrina.escobar@barrons.com