Gap (GAP)

Clothing and accessories retailer Gap (NYSE:GAP) reported Q4 CY2024 results exceeding the market’s revenue expectations, but sales fell by 3.5% year on year to $4.15 billion. On the other hand, next quarter’s revenue guidance of $3.39 billion was less impressive, coming in 1.4% below analysts’ estimates. Its GAAP profit of $0.54 per share was 43.4% above analysts’ consensus estimates.

Company Overview

Operating under the Gap, Old Navy, Banana Republic, and Athleta brands, Gap (NYSE:GAP) is an apparel and accessories retailer selling casual clothing to men, women, and children.

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Retailers offering casual yet trendy apparel for men, women, and children include H&M (OM:HMB), Inditex (BME:ITX) which owns Zara, Abercrombie & Fitch (NYSE:ANF), and American Eagle Outfitters (NYSE:AEO).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $15.09 billion in revenue over the past 12 months, Gap is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. For Gap to boost its sales, it likely needs to adjust its prices or lean into foreign markets.

As you can see below, Gap’s demand was weak over the last five years (we compare to 2019 to normalize for COVID-19 impacts). Its sales fell by 1.6% annually despite opening new stores and expanding its reach.

This quarter, Gap’s revenue fell by 3.5% year on year to $4.15 billion but beat Wall Street’s estimates by 1.9%. Company management is currently guiding for flat sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 1.1% over the next 12 months. While this projection suggests its newer products will catalyze better top-line performance, it is still below the sector average.

Number of Stores

Gap operated 3,569 locations in the latest quarter. It has opened new stores quickly over the last two years, averaging 2.8% annual growth, faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Gap’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat. Gap should consider improving its foot traffic and efficiency before expanding its store base.

In the latest quarter, Gap’s same-store sales rose 3% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

Gap has great unit economics for a retailer, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an excellent 44.3% gross margin over the last two years. That means for every $100 in revenue, only $55.74 went towards paying for inventory, transportation, and distribution.

Gap’s gross profit margin came in at 38.9% this quarter, down 29.5 percentage points year on year but still exceeding analysts’ estimates by 2.1%. Gap’s full-year margin has also been trending down over the past 12 months, decreasing by 6 percentage points. If this move continues, it could suggest a more competitive environment with pressure to discount products and higher input costs (such as labor and freight expenses to transport goods).

Gap was profitable over the last two years but held back by its large cost base. Its average operating margin of 5.6% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.

On the plus side, Gap’s operating margin rose by 3.6 percentage points over the last year.

In Q4, Gap generated an operating profit margin of 6.2%, up 1.3 percentage points year on year. The increase was encouraging, and since its revenue and gross margin actually decreased, we can assume it was recently more efficient because it trimmed its operating expenses like marketing, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Gap’s EPS grew at a solid 19.2% compounded annual growth rate over the last five years, higher than its 1.6% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.

In Q4, Gap reported EPS at $0.54, up from $0.49 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Gap’s full-year EPS of $2.21 to grow 1.8%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Gap has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.2% over the last two years, quite impressive for a consumer retail business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Gap’s margin was unchanged over the last year, showing it recently had a stable free cash flow profile.

Gap’s free cash flow clocked in at $499 million in Q4, equivalent to a 12% margin. The company’s cash profitability regressed as it was 1.2 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Gap historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.3%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.

Gap reported $2.59 billion of cash and $6.00 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.61 billion of EBITDA over the last 12 months, we view Gap’s 2.1× net-debt-to-EBITDA ratio as safe. We also see its $25 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We liked how Gap beat analysts’ revenue and EPS expectations this quarter. What's driving shares up is the full-year guidance for operating profit growth. The company is calling for 8-10% growth, which is well above expectations. Overall, we think this was a good quarter. The stock traded up 18.4% to $23.09 immediately following the results.

Updated: May 19, 2025 at 10:41 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Gap.

We cheer for all companies serving everyday consumers, but in the case of Gap, we’ll be cheering from the sidelines. To kick things off, its revenue has declined over the last five years. And while its expanding store base shows it’s playing offense to grow its brand, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its poor same-store sales performance has been a headwind.

Gap’s P/E ratio based on the next 12 months is 12.8x. This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $25.73 on the company (compared to the current share price of $27.57).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.