On Tuesday, Citi reaffirmed its Buy rating on Gap Inc. (NYSE:GPS) stock with a steady price target of $28.00. The optimism comes ahead of the retailer's first-quarter earnings report, expected to be released after the market closes on May 30, where a significant earnings per share (EPS) beat is anticipated.
Analysts at Citi forecast a $0.25 EPS, outpacing the consensus of $0.14, bolstered by better-than-expected comparable sales from Old Navy and a stronger gross margin.
The improved financial outlook is attributed to Old Navy's comparable sales, which are estimated to rise by 4%, surpassing the 2% consensus. Moreover, a gross margin increase of 220 basis points is expected, which is notably higher than the 160 basis points anticipated by the consensus.
Citi predicts that management will maintain its fiscal year 2024 sales guidance at a 1% decline but will increase the implied EPS guidance from the range of $1.30-1.35 to $1.40 or more, thanks to the stronger gross margin.
Gap's management is likely to provide second-quarter guidance that aligns with the consensus estimate of $0.34 EPS. The company is expected to experience a surge in Old Navy's second-quarter comparable sales as it faces easier year-over-year comparisons, especially in the active wear segment.
Additionally, Citi foresees a gross margin upside in the second quarter compared to consensus, as the company moves past significant markdowns from the previous year.
Citi also notes that investor sentiment towards Gap has been mixed recently, but the firm believes that the risk/reward ratio is favorable leading into the first-quarter earnings report.
To emphasize their positive outlook, Citi has initiated a 30-day positive catalyst watch for the stock. This period is marked by heightened attention due to potential positive developments that could affect the stock's performance.
InvestingPro Insights
As Gap Inc. (NYSE:GPS) approaches its first-quarter earnings report, real-time data and insights from InvestingPro serve to complement Citi's optimistic stance. Notably, the company's market capitalization stands at $7.93 billion, reflecting its substantial presence in the retail sector. Its P/E ratio of 15.71, adjusted to 14.64 for the last twelve months as of Q4 2023, suggests that the stock may be reasonably valued given its earnings. Furthermore, Gap's dividend yield of 2.83% as of the latest data points to a commitment to returning value to shareholders, which is underscored by its track record of maintaining dividend payments for 49 consecutive years—an InvestingPro Tip that highlights the company's financial resilience and dedication to investors.
InvestingPro Tips also reveal that six analysts have revised their earnings upwards for the upcoming period, indicating a positive shift in expectations which aligns with Citi's forecast of an EPS beat. Moreover, with a robust gross profit margin of 47.32% for the last twelve months as of Q4 2023, Gap's financial health appears solid. The company's revenue growth, while showing a slight decline of 4.66% over the last year, is counterbalanced by a quarterly revenue growth of 1.3%, suggesting a potential turnaround. For those seeking to delve deeper into Gap's financials and future prospects, InvestingPro offers additional analysis and tips, which can be accessed with a special offer: use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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