The Gap, Inc. (GPS Quick QuoteGPS - Free Report) has been benefitting from strength in the core business on restructuring efforts, including selling smaller non-strategic brands, transitioning to an asset-light partnership model and shutting down underperforming North American stores. Continued strength at the Old Navy and Athleta brands, and the solid online show remained upsides. Its Power Plan 2023 strategy also bodes well.

This led to better-than-expected fourth-quarter fiscal 2021 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. Notably, net sales rose 2.3% year over year, whereas comparable sales (comps) grew 3% each on a year-over-year and two-year basis. Although shares of GPS plunged 19.9% in the past three months, they came ahead of the industry’s decline of 20.2%.

That said, let’s delve deeper into the factors aiding the stock.

Key Growth Drivers

Gap’s powerhouse brand, Old Navy, which is focused on creating affordable, high-quality fashion for the entire family, remains a key catalyst. The Old Navy brand gained from higher sales in the Active, Denim, and Kids and Baby categories. Strong demand for the loyalty program and the introduction of inclusive sizing via the BODEQUALITY launch remained upsides. It has also been experiencing significant progress in its smaller brands. The Athleta brand’s value-driven active and lifestyle categories, increased digital marketing investments, and focus on product strategy have been aiding sales. Athleta also gained from a solid online show and growth in the wellness space, backed by the launch of AthletaWell. In fourth-quarter fiscal 2021, net sales improved 2% and 52% for the Old Navy and Athleta brands, respectively, from the pre-pandemic levels.

The company’s digital business has been performing well. Despite store openings, it continued to witness strength in the online business, with digital sales increasing 44% from the fourth quarter of fiscal 2019, accounting for 43% of total sales in the said quarter. Continued growth in the e-commerce business contributed significantly to the company’s consolidated sales as well as gains in its Gap, Old Navy and Athleta brands. The online business is benefiting from the company’s dominant omni-channel strength and scaled operations. Going ahead, management remains keen on optimizing its mobile experience as a key priority. Keeping along these lines, its native Android app has been gaining traction.

Driven by these factors, management issued the fiscal 2022 view, which seems encouraging. It expects adjusted earnings of $1.85-$2.05, whereas it reported $1.44 last year. Sales are anticipated to grow year over year in the low-single digits. The adjusted operating margin is likely to be 6-6.5%, suggesting an improvement from the prior year’s reported figure of 5.5%.

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for fiscal 2022 earnings is pegged at $1.90 per share, marking an increase of 1.6% in the past 30 days.

This Zacks Rank #3 (Hold) company remains on track with its Power Plan 2023, which focuses on opening highly profitable Old Navy and Athleta stores, while closing the underperforming Gap and Banana Republic stores. As part of the plan, the company expects the Old Navy and Athleta brands to contribute 70% of sales by 2023. In sync with its fleet-optimization efforts under the Power Plan 2023, the company aims to close 50-60 Gap and Banana Republic stores in North America in fiscal 2022. With the closing of underperforming Gap and Banana Republic stores, it expects to realize $100 million in EBITDA savings annually by 2023-end. Also, the company expects the e-commerce business to contribute 50% of sales by the end of 2023.

Hurdles on the Way

Gap has been reeling under elevated air freight expenses, which dented margins in the fiscal fourth quarter. The quarterly adjusted gross and operating margins contracted 260 basis points (bps) and 550 bps from fourth-quarter fiscal 2019, respectively. Also, higher investments in marketing and technology, and a rise in compensation and fulfillment costs remain concerning.

Bottom Line

Solid online show, strength in its Old Navy and Athleta brands, and the Power Plan 2023 strategy are likely to help Gap sustain its momentum despite cost woes. Also, a long-term earnings growth rate of 12% reflects its inherent strength.

Stocks to Consider

Here are three better-ranked stocks to consider — Nordstrom (JWN Quick QuoteJWN - Free Report) , Tapestry (TPR Quick QuoteTPR - Free Report) and Target (TGT Quick QuoteTGT - Free Report) .

Nordstrom presently sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 13.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Nordstrom’s current financial-year sales and EPS suggests growth of 5.7% and 180%, respectively, from the year-ago period’s reported numbers. JWN has an expected EPS growth rate of 6% for three-five years.

Tapestry presently has a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 28.2%, on average.

The Zacks Consensus Estimate for Tapestry’s current financial-year sales and EPS suggests growth of 17.5% and 22.9%, respectively, from the year-ago period’s reported numbers. TPR has an expected EPS growth rate of 12.5% for three-five years.

Target currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 21.3%, on average.

The Zacks Consensus Estimate for Target’s current financial-year sales and EPS suggests growth of 3.5% and 6.7%, respectively, from the year-ago period’s reported figures. TGT has an expected EPS growth rate of 16.5% for three-five years.