Gap Gains 31% After Impressive 3rd Quarter Earnings and Upbeat Forecast: Time to Buy GPS?

Shares of Gap Inc. (GPS) skyrocketed 31% Friday morning to end the week with a bang as the stock has now gained 74% in the past 3 months. 

The timing is right for Gap investors after the company delivered impressive 3rd quarter earnings and teased that more was to come in the quarters ahead. Revenue of $3.8 billion for the clothing brands group may have fallen 7% YoY but still outperformed the analyst consensus of $3.6 billion.

The spotlight was on profitability, though, as earnings of 59 cents per share came in well above the consensus of 19 cents per share. While this figure was down 23.4% compared to last year, gross margins did improve 4% to 41.3% as freight and commodity costs have come down.

Gap’s performance reflects a similar sentiment of other retail brands that reported earnings this week – such as Walmart and Target. The weakened consumer spending is taking its toll, and all signs are pointing to a weakened holiday spending season. 

CFO Katrina O’Connell spoke to this concern, saying that the mixed economic data and uncertain consumer trends will result in more prudent planning for the business. Cost cuts mean the company won’t have to resort to markdowns, though, so profits shouldn’t suffer. 

The company is also focused on better inventory management, something all retail brands are putting an emphasis on as sales dwindle. Gap is being more cautious in buying product while also being quicker to adapt to trends.

The improvements for brands like Old Navy and Gap are promising, but Banana Republic and Athleta will still have a lengthy recovery time. 

However, the introduction of BR Home – Banana Republic’s home furnishing line – is cause for optimism, as it will bring in new customers to the Gap ecosystem while also boosting income with higher-priced goods.

But, let’s take a deeper look at the stock itself. We’ve used the VectorVest stock analyzer and found 3 intriguing things investors or prospective traders need to see as it pertains to GPS right now…

Despite Poor Upside Potential and Safety, GPS Has Excellent Timing

The VectorVest system simplifies your trading strategy, replacing complex technical indicators and time-consuming analysis with 3 proprietary ratings. These are relative value (RV), relative safety (RS), and relative timing (RT).

Each rating sits on its own scale of 0.00-2.00 with 1.00 being the average. Based on the overall VST rating for a given stock you’re given a clear buy, sell, or hold recommendation - eliminating all guesswork and emotion from your decision-making. As for GPS, here’s what we found:

• Poor Upside Potential: The RV rating compares a stock’s long-term price appreciation potential (based on a 3-year forecast) to AAA corporate bond rates and risk. GPS currently has a poor RS rating of 0.61. It’s overvalued with a current value of just $8.59/share.
• Poor Safety: The RS rating is an indicator of risk. It’s derived from a deep analysis of a company’s financial consistency & predictability, debt-to-equity ratio, business longevity, price volatility, sales volume, and other factors. GPS has a poor RS rating of 0.82 right now.
• Excellent Timing: Where things get interesting is in looking at the stock’s price trend. GPS has tipped the scales with an excellent RT rating of 2.00. This rating is based on the direction, dynamics, and magnitude of the stock’s price movement day over day, week over week, quarter over quarter, and year over year.

The overall VST rating of 1.37 is very good - but does excellent timing outweigh poor upside potential and safety, or is it the other way around? 

VectorVest has placed a BUY recommendation on this stock for the time being - but we encourage you to learn more through a free stock analysis before making your next move.

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VectorVest advocates buying safe, undervalued stocks, rising in price. GPS gained 31% Friday morning after reporting 3rd quarter earnings that beat the top and bottom lines while showing optimism going into an uncertain holiday season. The stock has poor upside potential and safety but excellent timing, now up more than 74% in the past few months.

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