Gap Stock Tumbles 15% Post Q1 Earnings: Bargain Buy or Bearish Signal?

The Gap Inc. GAP stock slumped 14.85% in the after-hours trading session yesterday despite showcasing strong first-quarter fiscal 2025 results on the surface, with the top and bottom lines beating the Zacks Consensus Estimate. The after-hours sell-off was likely driven by concerns over $100-$150 million in tariff-related costs, a muted second-quarter and fiscal 2025 outlook, and continued struggles at Athleta and Banana Republic brands.Gap posted earnings per share of 51 cents, which beat the Zacks Consensus Estimate of 44 cents and improved 24.4% year over year. Sales were $3.5 billion, exceeding the Zacks Consensus Estimate of $3.42 billion and rising 2% year over year.The Gap, Inc. Price, Consensus and EPS Surprise  The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. QuoteHowever, the optimism about the strong results was dampened by management’s disclosure of potential tariff-related headwinds. This particularly included expectations of gross incremental costs of $250-$300 million, and net impacts of $100-$150 million to fiscal 2025 operating income, led by the current tariff policy. This unexpected hit to profitability, especially as the impacts are weighted toward the back half of the year, likely triggered investor concerns about margin compression and earnings pressure.Gap guided for flat year-over-year sales in the second quarter of fiscal 2025, which is weaker than what investors may have expected, given the current momentum. The company also reaffirmed fiscal 2025 sales growth of just 1-2%, suggesting limited upside despite recent brand performance improvements. This cautious outlook signals that much of the current turnaround is already priced in, leaving limited room for near-term re-rating.Additionally, management noted that the brand-specific weaknesses, particularly at Athleta and Banana Republic, are expected to persist. Comparable sales (comps) for the Athleta brand were down 8% in the fiscal first quarter, and management acknowledged continued struggles with product and customer alignment. Net sales for Banana Republic declined 3%, with flat comps, indicating a slow recovery despite some brand rebuilding efforts.Is GAP’s Overall Share Performance Just as Disappointing?Gap’s shares have experienced significant strength in the past three months. A closer look at the stock’s three-month performance reveals that it has outperformed the Retail - Apparel and Shoes industry in this period. The GAP stock has rallied 30.9% in the past three months compared with the industry’s growth of 4.9% and against the Retail-Wholesale sector’s dip of 0.9%. The stock also compared favorably with the S&P 500’s 0.6% rise in this period.Gap’s 3-Month Price Performance Image Source: Zacks Investment Research GAP shares have outperformed its competitors, including Abercrombie & Fitch Company ANF and American Eagle Outfitters Inc. AEO, which declined 14.2% and 9%, respectively, in the past three months. Additionally, Gap has outpaced Urban Outfitters’ URBN growth of 23.1% in the same period.Currently priced at $27.95, the GAP stock trades 8.6% below its 52-week high of $30.59 and 64.5% above its 52-week low of $16.99. The stock is trading above its 50-day and 200-day moving averages, indicating a bullish sentiment.GAP Stock Trades Above 50 & 200-Day Moving Averages Image Source: Zacks Investment Research Gap’s Cheap ValuationThe GAP stock trades at a forward 12-month price-to-earnings (P/E) ratio of 11.79X, significantly lower than the Zacks Retail – Apparel and Shoes industry average of 18.27X and the S&P 500’s multiple of 21.66X. Similarly, the forward 12-month price-to-sales (P/S) ratio of 0.68X is substantially lower than the industry average of 1.8X and the S&P 500’s average of 5.06X.With a forward 12-month P/E of just 11.79x, GAP trades at a discount to Urban Outfitters’ P/E multiple of 14.48X. However, the stock reflects a premium to peers like Abercrombie and American Eagle, which command significantly lower valuation multiples. Abercrombie and American Eagle have forward 12-month P/E ratios of 7.7X and 9.76X, respectively. Image Source: Zacks Investment Research Gap’s Inherent StrengthGap, a long-standing powerhouse in the apparel industry, continues to command a strong market presence through its well-diversified brand portfolio, which includes Old Navy, Banana Republic and Athleta. While the company still holds a notable share of the U.S. apparel market, its dominance has been tested by the rapid ascent of fast-fashion players and direct-to-consumer disruptors.In response to the ongoing industry headwinds, Gap has executed a focused strategic turnaround. Recent financial performance reflects this momentum, supported by initiatives aimed at revitalizing its core brands. The company has sharpened its operational focus by improving supply-chain efficiency, implementing disciplined cost controls, and accelerating digital transformation to elevate customer experience.Gap is also investing in product innovation, sustainability and high-impact collaborations to reconnect with younger, style-conscious consumers and reinforce brand relevance. These efforts, coupled with a growing international presence and robust e-commerce expansion, have positioned Gap to remain a formidable player in a fast-evolving retail landscape.Is This the Right Time to Buy GAP Stock?Despite the steep drop in Gap’s stock following its recent quarterly report, the decline seems to stem more from short-term concerns than any fundamental weakness in the business. The company delivered a strong set of results, exceeding sales and earnings expectations, signaling continued progress in its strategic turnaround. However, management’s caution around the potential financial impacts of new tariffs raised investor concerns about margin pressure in the coming quarters. While these headwinds are notable, they appear to be temporary challenges rather than signs of a structural shift in the company’s long-term trajectory.Valuation-wise, Gap remains attractively priced relative to its peers, suggesting that the stock can offer value for long-term investors. The company continues to benefit from operational improvements, brand momentum and a growing digital presence. That said, near-term uncertainty tied to trade policy, as well as ongoing struggles at some of its key brands, tempers the bullish case.With a Zacks Rank #3 (Hold) and a Value Score of A, Gap stock may be best suited for watchlists rather than immediate action, offering potential upside once clarity on external pressures improves. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.Today, See These 5 Potential Home Runs >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Abercrombie & Fitch Company (ANF): Free Stock Analysis Report American Eagle Outfitters, Inc. (AEO): Free Stock Analysis Report Urban Outfitters, Inc. (URBN): Free Stock Analysis Report The Gap, Inc. (GAP): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks