Sharp increases in inventories after the recovery plan translate into quarterly results and better prospects

Gap Inc. Stock (GPS) rallied more than 23% in extended trading on Thursday after the clothing and accessories retailer posted a better-than-expected quarterly earnings report and raised its full-year outlook, a sign that the company’s turnaround plan is paying off .

For the three-month period ending May 4, the retailer reported earnings per diluted share of 41 cents, which beat analyst estimates of 14 cents per share. Sales for the quarter of $3.39 billion increased 3% from the prior year and exceeded expectations of $3.29 billion.

What’s behind Gap’s stellar earnings?

Gap’s comparable store sales increased 3% compared to the same period last year, a significant improvement compared to a decline of 4% in the same quarter last year. The turnaround was driven by positive same-store sales growth for each of the retailer’s four brands, which include Old Navy, Gap, Banana Republic and Athleta.

Looking ahead, the company raised its full-year guidance, saying it now expects net sales to increase slightly, an improvement over previous guidance that called for flat annual sales. It also raised its full-year operating income forecast to mid-range growth of 40%, significantly higher than its earlier low-to-mid teen growth forecast.

“We are very confident in our quarter, which has given us the confidence to raise our full-year 2024 guidance on both revenue and operating margin prospects,” Gap CEO Richard Dickson said. CNBC in an interview after the quarterly results.

Dickson, whom Gap named CEO last August, has implemented an ambitious turnaround plan in which the retailer has worked to improve its operational efficiency and reposition the company’s brands at the vanguard of culture. Thursday’s quarterly results and forecasts indicate that the plan is working and is appreciated by investors.

Monitor this key level on the chart amid earnings-led growth

Since hitting a low last May, Gap shares have been trending higher, with gains accelerating after the 50-day moving average (MA) crossed above the 200-day MA in early October, forming a golden cross pattern. Based on the retailer’s quarterly results, the company’s stock rose towards its 50-day moving average after a period of recent consolidation, indicating bullish expectations from market participants.

With the company’s stock expected to rally on Friday on the back of earnings, investors should closely monitor the $28.50 level, an area where the price is likely to see overall resistance from the March 2024 high.

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As of the date of writing this article, the author does not hold any of the above securities.