Gap Inc (GPS) shares surged Friday after the iconic clothing retailer posted a narrower-than-expected fourth quarter loss while forecasting solid 2022 profits as Covid-era restrictions on shopping and socializing come to an end.
Gap said adjusted profits for the current financial year, which ends next January, would come in between $1.85 and $2.05 per share, a stronger-than-expected tally that followed a 2 cents per share loss for the holiday quarter that was highlighted by improving demand at its Old Navy and Athleta branded stores.
Group revenues for the quarter were up 2% from last year at $4.5 billion, but remain down 3% from pre-pandemic levels, with a 2022 outlook of growth in the 'low single digit' range.
Freight costs, supply chain disruptions and wage increases are all likely to add to margin pressures, however, as the group looks to stay ahead of changing consumer trends by stocking-up on goods and building higher levels of inventory. Still air freight costs are likely to fall by between 20% and 25% from 2021 levels, the company said, allowing for an easing of margin pressures later in the year.
"In order to meet demand, we utilize significant air freight to deliver as much of holiday product as we could. As a result, sales were muted and profits pressured," CEO Sonia Syngal told investors on a conference call late Thursday. "While Q1 will have moderate product delays that necessitated air freight as a result of the aforementioned actions, our summer and go-forward deliveries are expected to be more on time and require only modest more normalized air."
"By the end of the first half, we expect the transitory air costs will have mostly flowed through the P&L," she added.
Gap shares were marked 6.7% higher in pre-market trading Friday to indicate an opening bell price of $15.20 each, a move that would still leave the stock down more than 38% over the past six months.
"Similar to other companies, GPS guided FY22 above consensus, and we believe materially above fears," said BMO Capital Markets analyst Simeon Siegel, who lowered his price target on the group to $16 per share, with a 'market perform rating' following last night's earnings call.
"Also similar to others, the burden of proof is now on GPS to attain that guide, particularly in light of a history of volatility and challenging guidance conversion," he added. "Absent signs to the contrary, we remain wary that the path up will prove as easy as guidance may suggest."
