Gap Inc. has delivered a strong performance in the second quarter, exceeding analysts’ expectations and boosting its outlook for the full year. The company reported earnings per share of 54 cents, beating the consensus estimate of 40 cents. Quarterly sales reached $3.72 billion, a 5% increase compared to the previous year and surpassing the expected $3.63 billion. This positive news led to a surge in GAP shares, which were trading higher by 2.54% at last check Thursday.
The retailer’s strong performance can be attributed to a number of factors. Comparable sales increased by 3%, driven by strong performances from both Old Navy and Gap. Store sales surged by 4% year-over-year, reflecting the company’s expanding footprint to 3,568 locations across nearly 40 countries. Meanwhile, online sales spiked 7%, now accounting for 33% of total net sales.
Gap’s operating margin also improved significantly, increasing by 490 basis points to 7.9% compared to the previous year. This improvement was fueled by a 410-basis-point increase in merchandise margin, driven by lower commodity costs, higher sales linked to the revenue-sharing deal with its credit card partner, and enhanced promotional efforts.
The company’s financial position is also strong. Gap ended the quarter with $2.1 billion in cash, cash equivalents, and short-term investments, representing a 59% increase year-over-year. Operating cash flow was $579 million, with free cash flow of $397 million after accounting for capital expenditures. Ending inventory stood at $2.11 billion, a 5% decrease from the previous year.
Looking ahead, Gap has reaffirmed its net sales and operating expense outlook for fiscal 2024. However, it has also increased its outlook for gross margin and operating income growth. The company now expects gross margin improvement of 200 basis points, up from the previous forecast of 150 basis points, and operating income growth in the mid-to-high 50% range, an increase from the prior mid-40% growth projection. For the third quarter, Gap projects a gross margin expansion of 50 bps to 75 bps and expects net sales to increase slightly year-over-year.
Gap’s CEO, Richard Dickson, highlighted the company’s progress in reinvigorating its brands and strengthening its financial position. He stated, “In comparison to where we were only one year ago, we are in a stronger position across key metrics that matter – including net sales, margins, and our cash position – and we are making consistent progress in the reinvigoration of our brands.” The company’s strong performance and positive outlook suggest a promising future for Gap Inc.
