Gap Stock Spikes on 2021 Sales Outlook

Gap NYSE: GPS reported its Q4 2020 earnings yesterday after the bell. The apparel retailer’s fourth-quarter numbers left a lot to be desired, but shares went up more than 3% after hours on a better-than-expected 2021 sales outlook.

The company generated $4.42 billion in fourth-quarter sales, down 5% yoy and well below analyst estimates of $4.66 billion.

EPS was 61 cents per share in Q4, compared to a loss of 49 cents per share in the year-ago period and above analyst estimates of 19 cents per share. But that included 45 cents per share in one-time tax benefits and a 12 cents per share impairment charge; it’s not clear if analysts had included those items in their estimates.

Gap is forecasting revenue of $15.9 billion to $16.4 billion for 2021; the $16.15 billion midpoint is above consensus estimates of $16.04 billion. The apparel retailer expects to earn $1.20 to $1.35 per share in 2021; the midpoint of $1.275 is a hair above analyst estimates of $1.27.

Overall, the numbers look decent, but Gap’s Q4 was nothing special. So why are shares moving higher?

The whisper numbers tend to be higher than the published estimates for most stocks, but in Gap’s case, they may have been lower.

In the fourth quarter, COVID-19 cases peaked, which led to restrictions in North America, Europe, and Asia. Gap, a company that relies heavily on in-store sales, gets hit hard when people stay at home – whether it’s voluntary or involuntary. On the Q4 earnings call, management said, “The pandemic-related impact to fourth-quarter sales is estimated to be approximately four percentage points.”

The vaccines are currently being distributed, but it does not appear that we will return to the “old-normal” until late 2021 or early 2022. That challenge makes Gap’s strong 2021 forecast more impressive.

Gap is Focusing on Its Winners

 In the fourth quarter, Gap’s sales across its portfolio were as follows:

• Old Navy: net sales increased 5% yoy, and comps were up 7% yoy.
• Athleta: net sales increased 29% yoy, and comps were up 26% yoy.
• Gap: net sales dipped 19% yoy, and comps were down 6% yoy.
• Banana Republic: net sales were down 27% yoy, and comps dipped 22% yoy.

Old Navy and Athleta have a history of outperformance, while Gap and Banana Republic have a history of underperformance. Instead of letting the losers hurt the company, and not fully leveraging the winners, Gap has chosen to do something about it. The company plans to open 30 to 40 Old Navy stores and 20 to 30 Athleta stores in 2021. It also plans to close 100 Gap and Banana Republic stores.

On the Q4 call, management noted that Old Navy is now the No. 2 apparel brand in the US behind Nike NYSE: NKE. Athleta just surpassed $1 billion in sales and grew 16% for full-year 2020. Together, Old Navy and Athleta accounted for 63% of company sales in 2020, and Gap thinks they can get up to 70% of company sales by 2023.

Gap Has a Solid Online Business

A strong e-commerce presence has turned into a differentiator between the haves and the have nots in a COVID-impacted world. Companies that aren’t taking their e-commerce operations seriously have struggled mightily of late.

Gap has done an excellent job here; its online business grew 54% yoy in 2020 and now makes up 45% of total company sales, up from 25% in Q4 2019. Its online channel is No. 2 in apparel e-commerce sales at over $6 billion.

The company plans to fully implement and integrate its loyalty program across all of its brands this summer. Management noted that “members of [Gap’s] loyalty program outspend non-loyalty customers by more than 80%.” A solid loyalty program is one of the most important predictors of success, so this initiative shouldn’t be overlooked.

How Should You Play Gap?

Gap is trading at less than 20x forward earnings – solid value for a company with decent growth prospects.

Shares have been basing between around $19 and $27 a share since November. GPS looks set to open around $26.30 tomorrow.

It’s tempting to get into GPS now, but it’s likely best to wait for shares to break above $27 on high volume – that would also mark a 52-week high.