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Here’s Why Gap Shares Are Going Through the Roof Today

Old Navy is Gap Inc.'s largest brand, followed by Gap and Banana Republic.Old Navy is Gap Inc.'s largest brand, followed by Gap and Banana Republic.
Old Navy is Gap Inc.'s largest brand, followed by Gap and Banana Republic.Photograph by Bloomberg via Getty Images

Ah, the magic of low expectations. Gap Inc (GPS) gave investors a pleasant surprise for once when it announced comparable sales in June unexpectedly rose, snapping a 14-month losing streak and sending shares up 7% on Friday.

The largest U.S. specialized apparel retailer stirred hope among beleaguered investors that its long-awaited turnaround could finally be emerging when it announced that comparable sales (sales at stores open at least a year, along with online sales) rose 2% last month. Wall Street had expected them to drop 3.6%. Gap Inc credited improving shopper traffic trends, particularly at its Old Navy unit, which generates about 40% of company sales.

Old Navy, a low-price brand that had been booming until the autumn, saw its comparable sales rise 5%, signaling the potential end of a slump there: Its comparable sales had slipped in six of the previous eight months, a period that coincided with the departure of Stefan Larsson, the executive who oversaw the chain’s boom. In May, Gap said it was shutting Japanese Old Navy stores to focus on North America and China.

Last year, Gap Inc CEO Art Peck had promised investors the company’s turnaround would materialize by spring, only to see sales declines persist. The company has been looking to speed up production times and change its processes so that it can more quickly react to changing fashions and drop lines that are flopping to better compete with the likes of H&M and Zara.

 

Yet despite the solid Old Navy results (which are just for one month, after all), Gap Inc still has a long way to go. Comparable sales at the Gap brand fell 1% (their 25th straight monthly decline), while at Banana Republic they were down 4%. The declines were smaller than expected, but were still declines. And despite their jump on Friday, Gap shares remain about 40% off 52-week highs. Indeed, Credit Suisse maintained its sell rating on the stock, saying of the Gap brand that “the timeframe for the long-awaited fashion-driven improvement is taking longer than originally expected.”

As CEO Art Peck put it in May when he last spoke to investors: “Clearly, we need to do more, faster.”