GAP (NYSE: GPS) Is A Buy No Matter What Their Earnings Are

With their shares after rallying 300% over the past 6 months, it’s safe to say that expectations are high for GAP’s (NYSE: GPS) Q3 earnings, due after today's market close. Like with many other retailers, 2020 has been a year of reckoning. Some have been able to successfully pivot to e-commerce and digital sales while others have struggled with the move. GAP are firmly in the former camp and Wall Street has been only too happy to back them.

The last time investors got a look at the internal numbers was towards the end of August. Though revenue was still down on the year and EPS was still negative, both came in better than analysts were expecting. Their comparable sales number managed to grow year over year, shocking analysts who’d been expecting a heavy contraction. This was largely driven by impressive growth in GAP’s online sales, which effectively doubled compared to the same period in 2019.

Solid Momentum

August’s Q2 report helped to propel shares to their highest levels since before COVID and the rally has continued since then to put shares 50% higher than were they were when COVID struck. The bulls will be hoping that tonight’s numbers can inject some fresh momentum which will fuel the rally through the end of the year. But even if, for whatever reason, the numbers don’t impress, GAP is probably still a buy.

While Q2’s numbers confirmed that things weren’t as bad as feared and that a recovery could be quicker than initially expected, there have been plenty of solid headlines and comments in the months since to make GAP an attractive stock for the long term. Towards the end of October, management hosted an impressive Investor’s Day where they surprised investors by saying they expect a return to profitability by next year while reducing costs in the meantime to the tune of $100 million.

RBC Capital Markets, Barclays, and Telsey Advisory Group all came out with fresh upgrades and increases to their price targets in the wake of the presentation as management ticked all the right kinds of boxes. And only yesterday, JPMorgan were out with a bullish upgrade to GAP shares, moving them to an Overweight rating in advance of tonight’s report. Even with the recent rally, they’re still viewing shares as undervalued from a longer term perspective, with plenty of upside still to be captured.

Long Term Potential

In a note to clients, analyst Matthew Boss said; "importantly, we see upside to the "E" multi-year - conservatively modeling FY23 EBIT margins of 7% relative to management's 10%+ EBIT margin target outlined at the 10/22 Investor Day.” Boss also raised his price target to $30, suggesting upside of at least 15%, while simultaneously setting high expectations to tonight’s numbers. Specifically, he’s looking for EPS of $0.40 which is 30% higher than the Street’s consensus as well as strong performance from their Athleta brand. With the pandemic fuelled growth in ath-leisure wear, he thinks Athelta has the potential to double GAP’s revenue by 2023.

With the recent flow of positive news of a COVID vaccine becoming available in the coming months, investors thinking about getting involved are also going to ride the wave of positivity that’s sweeping across industries that were most heavily affected by COVID. The likes of airlines and hotels are doing well right now and even though GAP has had a solid summer by any measure, it’s still part of the retail industry which is looking likely to finish the year far stronger than how it started it.

Retail stocks also have the added bonus of the holiday season starting to kick off, which typically puts them high on Wall Street’s list of priorities. Given GAP are among the best performers in retail this year, they’re likely at the top of every firm’s wish list for Christmas.