While not as powerful as the Aug’23 Abercrombie & Fitch Co. (ANF) Inflection Point, the earnings-crusher reported by Gap Inc. (GPS) last night is worthy of Top Tier status.
We have been following the Gap turnaround for numerous quarters and this one certainly stands out at THE BEST for numerous reasons:
To wit, for the first time in many years, all four brands comped positively, catalyzing not only a nearly 200% Top Tier Inflection on the bottom line, but also, a 3% beat on the Top Line.
Gap reports Q1 EPS 41c vs consensus 14c / Q1 Revenue $3.4B vs consensus $3.29B / Comparable Sales up 3% YoY
"Gap Inc. delivered a strong quarter that exceeded expectations across key metrics. We gained market share for the 5th consecutive quarter with positive comparable sales at all brands, demonstrating improved relevance with our customers as we execute against our brand reinvigoration playbook. Our first quarter results are giving us confidence to raise both sales and operating income guidance for the full year," said Gap Inc. President and Chief Executive Officer, Richard Dickson.
The inflection in Gross Margins was quite powerful allowing the company to lift Gross Margin guidance on the year, along with Operating Income guidance from the mid-teens to 40%+.
We think Gap will finish this year with Gross Margins around 41%. With OpEx management very tight, along with Inventories down 15% YoY, we believe the odds are good we could even see more upside to 41% on the year.
Gross Margins of 41%+ should lead us to $2 in EPS this year, creating a dispersion between the slow moving Sell Side forward consensus and likely forward numbers to be reported. Remember, Gap is like a steam boat that takes a while to turn. Now that all four brands have inflected positively, we think the momentum can continue and the company will post another nice beat in Q2 and also in Q3.
The next two quarters look REALLY GOOD. Typically, Gap’s Q1 is followed by two more strong quarters through the Back-to-School quarter. Here is what the sequential cadence looked like in CY2021 from Q1’22 to Q2’22 that year. We think history repeats itself:
The thesis here is quite simple. Select Retail is hot. Look at ANF and DECK.
GPS has all the Top Tier trappings we look for: A big gap higher, a valuation disconnect, a cheap stock inflecting in a good group. We expect volume to inflect too as new Institutions buy in aggressively.
Similar to how Institutional Ownership in ANF increased by nearly 50% since its inflection last August…
So too, do we think a horde of fresh institutional buying will buy in over the rest of Q1. Gap has a much bigger share count than ANF, so we think we will actually see a couple hundred funds move into the name in both Q1 and Q2:
On a final note, we also think Gap's new CEO should bring additional further operating efficiencies to the company, perhaps allowing margins to inflect toward the mid-$40s longer-term.
In summary, Gap has all the perfect ingredients for a follow through move. We therefore give this name a 9-conviction rating.
In terms of risks, obviously, macro concerns are front and center.
Should supply chains see an inflationary jolt or the U.S. consumer fall off of a cliff, our thesis would clearly not pan out. For now, we think these risks are very muted in the near-term.
We bought stock in the After Hours last night, in the $27s, plan to add to our position on dips into the $26s and low $27s.
We will top off on any move through 52-week highs and also plan to be full in our positioning an hour after any such move to new highs is made.
We think the stock is heading into the $30s in the near-term and can be $35 by the end of the summer.
If our thesis plays out as we think it will, a move to $40+ by the end of the year is also within reason.
STOP LOSS: $24.50.
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Disclosure: We are long GPS stock. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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