Gap Inc. (GPS) -) shares soared in early Friday trading after the clothing brands group posted stronger-than-expected third quarter earnings while indicating profit margins would improve over the final weeks of the year.
Gap, which also operates the Old Navy and Banana Republic brands, said adjusted earnings for the three months ending on October 28 were pegged at 59 cents per share, down 23.4% from the same period last year but blasting the Street consensus forecast of 19 cents per share.
Group revenues fell 7% to $3.8 billion, but again topped analysts' estimates of a $3.6 billion tally, while gross margins improved by nearly 4 percentage points, to 41.3%, thanks in part to lower commodity and freight costs.
The sales declines across its brands are likely to continue into the holiday quarter, Gap said, but costs cuts and fewer markdowns will deliver "strong process in our margin recovery."
Related: Walmart slumps as cautious consumer spending outlook clouds Q3 earnings beat
"We are mindful of the mixed economic data and uncertain consumer trends in the marketplace, and as a result, we continue to take a prudent approach to planning the business," CFO Katrina O'Connell told investors on a conference call late Thursday. "While we are encouraged by the improvement in performance at Old Navy and Gap, we now anticipate a longer recovery timeline for Athleta and Banana Republic."
"Our goal will be to remain very disciplined on inventory (and) that enables us to grow gross margins through lower promotions," she added. "But it also allows us to utilize our responsive levers to chase trends closer in to consumer demand, which also allows us to be more relevant and also allows us to then achieve higher gross margins."
Gap shares were marked 26.7% higher in pre-market trading to change hands at $17.34 each, a move that would extend the stock's 2023 gain to around 48%.
"Gap and its brands experienced sales decreases due to changing customer preferences and challenges with certain products," said CrispIdea Research analyst Aishwarya Dinesh.
"Moreover, the company expects lower sales for FY24. GPS is actively improving its inventory management, buying more carefully, and responding better to trends," he added. "Additionally, Banana Republic introduced BR Home, a new home furnishings line (and) the collaboration with LoveShackFancy is a smart move to generate interest and potentially charge higher prices for their products while attracting new customers".
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