Gap Earnings: Margin Improvement Demonstrates Potential if Sales Improve; Shares Attractive

Gap’s results beat our expectations in Richard Dickson’s first full quarter as CEO. While strong sales growth at highest-potential brands Old Navy and Athleta is elusive, the improvement in profitability supports our forecast of 7.5% operating margins by 2027. We do not expect to make any material change to our fair value estimate of $24 per share, keeping shares undervalued after they rose 6% in aftermarket trading on March 7. We rate Gap as a no-moat firm due to years of mismanagement and intense competition in apparel retail, but we are encouraged that Dickson appears to be tackling problems with changes in merchandising, management, and logistics.