(Bloomberg) -- Gap Inc. stock soared after it raised its full-year outlook as the apparel retailer attracts wealthier shoppers seeking value.
Gap shares increased as much as 17% in Friday trading in New York, the stock’s biggest gain intraday since May 31. The stock has risen 5.4% this year through Thursday’s close, below the gain of the S&P 400 Midcap Index.
Other apparel retailers also jumped on Friday, with Abercrombie & Fitch Co. gaining as much as 9.1% and Urban Outfitters Inc. climbing as much as 4.5%.
The owner of Old Navy and Athleta now sees sales up 1.5% to 2% this fiscal year, versus a previous view that the measure would climb less than 1%. Gap also increased its forecast for gross margin, a gauge of profitability, and operating income.
“We’re running a fundamentally better business than we did last year,” Chief Executive Officer Richard Dickson said in an interview. He added the company’s brands are capturing market share “across categories” and said it was the seventh straight quarter of gains.
During a call with analysts, Dickson said the company continues “to see share gains from our middle- and higher-income cohorts,” specifically mentioning consumers who earn more than $100,000 a year. Old Navy, known for its lower prices, has drawn shoppers looking for value, he added.
In the third quarter ended Nov. 2, Gap saw a 1% increase in sales across all brands for stores open at least a year, lower than the 1.7% average estimate of analysts surveyed by Bloomberg. Looking at specific chains, Old Navy and Banana Republic also missed Wall Street expectations, while Gap brand stores and Athleta performed better than projected.
After years of price increases, retailers are contending with consumers who are now spending a bigger portion of their paychecks on groceries and essential goods. At the same time, warmer-than-normal temperatures in recent months also eroded apparel sales as shoppers refrained from buying cold-weather garments.
Warm Weather
Executives confirmed that the weather was an issue at Old Navy, which is Gap’s biggest revenue generator among its brands. While women’s and men’s performed well, the warmer weather led to fewer sales of coats and outerwear for kids.
Across brands, third-quarter sales rose 2% to $3.8 billion, in line with analyst estimates. Sales at physical stores fell 2% in the period from a year earlier, while online sales increased 7%. Inventory ended the period down 2%, with the company citing better management for improved merchandise margin.
Dickson said the company is monitoring potential tariffs on Chinese goods under a new Trump administration and is well positioned with less than 10% of merchandise coming from China. That’s down from 22% in 2018.
Chief Financial Officer Katrina O’Connell said that August “was really strong for us because the customer was responding very well to our back-to-school assortment,” which was followed by a dip in September due to warm weather and hurricanes. Performance then improved in October, and Gap is “pleased with the start to the holiday season,” she said.
Jefferies analysts led by Corey Tarlowe credited Dickson with “implementing a strategy that has improved business operations across all banners” in a note published Friday.
Third-quarter results demonstrate “consistency in the business and highlights how Gap is evolving into a better operator, giving us more confidence in sales growth and margin expansion in fiscal 2025,” wrote Citi analysts led by Paul Lejuez.
(Updates share trading and adds analyst comment.)
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