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Apparel firm Gap (GAP +13%) is surging today on robust earnings and sales upside in Q4 (Jan). The company has been in turnaround mode for several quarters, appointing a new CEO in 2023, who outlined a comprehensive strategy to return to what can separate Gap from its peers. During its turnaround, Old Navy's comps flipped positive, becoming a main profit driver. At the same time, Gap delivered steady margin improvements. Now, after a year of fixing its fundamentals, Gap mentioned that it is ready to allocate its attention to continuous innovation, paving the way for long-lasting upward momentum.

• What stood out most from Gap's Q4 report was its +3% comparable sales growth, which surpassed estimates and accelerated from +1% in Q3 (Oct), helping the company close the year out with positive comps each quarter. This level of consistency supported Gap's eighth consecutive quarter of market share gains, a testament to management's ability to adapt to fashion trends and craft a marketing campaign that has resonated with consumers.
• Nearly every banner posted positive comp growth in Q4, a similar trend from last quarter. Old Navy, comprising over half of total sales, registered +3% comp growth, touting continued wins in active and denim categories. Gap, the company's second-largest banner, led the way with a +7% comp, illuminating its brand reinvigoration playbook; CEO Richard Dickson mentioned that the brand is back in the cultural conversation. Banana Republic and Athleta reversed roles in Q4, with the former registering +4% comps compared to a -1% drop last quarter and the latter delivering -2% comps versus a +5% jump in Q3.
  • Management noted that there is still work to do to improve Athleta and position it for upward momentum. Conversely, at Banana Republic, the company enjoyed a notable improvement in its women's business while also building on its strength in men's.
• Gap is still traversing a dynamic economic landscape, evident by its relatively conservative FY26 revenue guidance, projecting growth of just +1-2% following a 1% increase in FY25. The company cautioned that the fluidity of the economy it endured last year will likely hold throughout 2025. However, regarding tariffs, Gap was not overly concerned, noting that during FY25, it sourced under 10% of its products from China and less than 1% from Canada and Mexico combined. The company's FY26 guidance already includes any expected margin impact, albeit small, from tariffs.

Like last quarter, Gap's Q4 results further reflected encouraging turnaround progress. The holiday season clearly provided positive momentum heading into 2025. Even though some banners could take longer than others to realize their full potential, including Banana Republic and Athleta, we like the moves CEO Richard Dickson has been making and view the stock as attractive even though today's pop places shares back in their previous trading range as continued momentum can begin to propel Gap above resistance around $25.00.