What Happened:
Shares of clothing and accessories retailer The Gap (NYSE:GPS) jumped 14.9% in the morning session after the company reported third quarter results that blew past analysts' revenue and EPS expectations, although its revenue declined in absolute terms. These beats were driven by better-than-expected same-store sales performance (analysts forecasted a 7% decline, and Gap posted a 2% decline). In the earnings release, management called out market share gains in the competitive casual apparel space. We were also excited its gross margin and free cash flow outperformed Wall Street's estimates - many were expecting Gap to post negative free cash flow. Management noted that rigor around expenses "has put the company on stronger financial footing and is enabling us to focus on reinvigorating our portfolio of brands, strengthening our operating platform, and reviving our culture for success." As a reminder, as a new CEO at the helm. Richard Dickson assumed the role in August 2023, and this is a good start for the new leadership of a company that has had its fair share of troubles in the last few years. Zooming out, we think this was an solid quarter amid low expectations that should please shareholders.
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What is the market telling us:
Gap's shares are quite volatile and over the last year have had 24 moves greater than 5%. But moves this big are very rare even for Gap and that is indicating to us that this news had a significant impact on the market's perception of the business.
Gap is up 48.6% since the beginning of the year. Investors who bought $1,000 worth of Gap's shares 5 years ago would now be looking at an investment worth $661.79.
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