Ahead of the Bell: Gap gains as outlook brightens

Associated Press

NEW YORK (AP) — A 60 percent jump in quarterly earnings heading into the critical holiday shopping season is warming Gap investors like a cable knit scarf.

Shares rose 4.2 percent to $34.65 in premarket trading Friday after the retailer posted strong results for the August-September quarter and raised its outlook for the year.

The company, which also runs Old Navy and Banana Republic stores, has long struggled to reclaim its position as a top shopping spot, with sales dropping year after year in North America.

The powerful third quarter is just the latest evidence that turnaround efforts have succeeded, and momentum heading into the holidays is strong. November and December can make up 40 percent of a retailer's entire annual revenue.

Gap has replaced major executives in the past few years and overhauled how it organizes its departments to compete better internationally.

Crucially, Gap is "making the right decisions on product," said Janney analyst Adrienne Tennant. Having clothes that appeal more to consumers means Gap will need to rely less on markdowns to sell merchandise, and Tennant noted that the company was selling clothes at full price at a "strong level...across all divisions."

Full prices mean that Gap can grow profit even more. With "significantly better" products in stores than a few years ago, the company should further increase its profitability next year, said Lazard analyst Jennifer Davis.

Analysts said that the company could also get a profit boost from lower cotton prices. A big run-up in costs for materials last year hurt Gap's profitability.

Gap Inc. on Thursday lifted its profit outlook for the year to $2.20 to $2.25 per share from a previous forecast of $1.95 to $2 per share. That shifted the company's guidance to be more in line with Wall Street's expectations. Analysts had predicted annual profit of $2.25 per share for the year ending in January, according to FactSet.

The San Francisco company's stock has gained 79 percent this year as investors bet on a comeback.