The Gap, Inc. is well-poised to tap the positive trends in the fashion world, thanks to its robust strategic initiatives including the Power Plan 2023 Strategy. The company is gaining from brand strength and the solid demand for its products that resonate well with customers. It remains committed to creating a trend-right merchandise assortment, deepening relations with customers via marketing, enhancing the digital commerce agenda and efficiently controlling expenses. Management is encouraged by the improved performance at Old Navy and its namesake label and expects a longer recovery time for Athleta and Banana Republic.

Buoyed by such strengths, shares of this clothing and accessories retailer have surged a whopping 89.6% compared with the industry’s 12.6% growth in the three-month time frame. A Value Score of A further adds strength to this current Zacks Rank #1 (Strong Buy) company. The Zacks Consensus Estimate for GPS fiscal 2023’s earnings per share is pegged at $1.15, reflecting an increase of 387.5% year over year. This highlights analysts’ confidence in the stock.

Let’s Analyze Further

Gap has been aggressively undertaking cost-management actions. It has been making efforts to simplify and optimize its operating model and structure, including increasing spans of control and decreasing management layers to improve the quality and speed of decision-making, as well as creating a consistent organizational structure across its brands. The company is focused on actioning more than $550 million as annualized cost savings, realizing margin expansion on lower air costs, improved discounting and effective sourcing strategies.

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Gap is on track with the execution of its Power Plan 2023, which focuses on opening highly profitable Old Navy and Athleta stores while closing the underperforming Gap and Banana Republic stores. Further, it expects to leverage its powerful platform to deliver competitive omni capabilities to meet customers’ needs,  fueled by its scaled operations. Through the plan, the company expects to deliver consistent sales growth, margin expansion and strong operating cash flow.

The company expects to open 15 to 20 Old Navy and Athleta stores and close 50 Gap and Banana Republic stores in fiscal 2023. This is in sync with its plan to close 350 Gap and Banana Republic stores in North America by the end of fiscal 2023. With the closing of underperforming Gap and Banana Republic stores, the company expects to realize $100 million in EBITDA savings on an annualized basis by the end of the current fiscal year. As part of the plan, the company expects the Old Navy and Athleta brands to contribute about 70% of sales by fiscal 2023.

Markedly, Gap has been gaining from lower airfreight and improved promotional activity for a while now. This has been aiding the company’s margins and, in turn, the overall profitability. During third-quarter fiscal 2023, the gross margin expanded 390 basis points (bps) year over year on a reported basis and 260 bps on an adjusted basis. Merchandise margin increased 340 bps on 180 bps of leveraged commodity costs and lower air utilization, as well as 160 bps of improved promotional activity from better inventory position and robust assortments. Meanwhile, the adjusted operating margin increased 290 bps to 6.8%, driven by an improved gross margin and adjusted SG&A leverage. Adjusted SG&A expenses also declined 7% year over year stemming from the organizational changes and other cost-control efforts.

Going ahead, management expects the gross margin to expand in the fourth quarter of fiscal 2023. This will be backed by merchandise margin expansion of 280 bps stemming from lower commodity costs and reduced air utilization. It anticipates promotional levels to be roughly in line year over year. For fiscal 2023, Gap expects gross margin expansion versus an adjusted gross margin of 35% in fiscal 2022, buoyed by an estimated 200 bps of leveraged airfreight and about 170 bps of leveraged promotional activity stemming from lower inventories and better assortments.

Given all the positives, Gap stock seems to deserve a place in your investment portfolio.

Eye These Solid Picks Too

We have highlighted three other top-ranked stocks, namely Abercrombie & Fitch (ANF Quick QuoteANF - Free Report) , Hibbett and American Eagle (AEO Quick QuoteAEO - Free Report) .

Abercrombie & Fitch, a leading casual apparel retailer, currently sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Abercrombie & Fitch’s current financial-year sales suggests growth of 13.3% from the year-ago reported figure. ANF delivered an earnings surprise of 713% in the last reported quarter.

Hibbett, the key sporting goods retailer, currently sports a Zacks Rank of 1. HIBB delivered an earnings surprise of 24.2% in the trailing four quarters.

The Zacks Consensus Estimate for Hibbett’s current financial-year sales suggests growth of 1.7% from the year-ago reported figure.

American Eagle, a leading apparel retailer, currently carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for American Eagle’s current financial-year sales suggests growth of 4% from the year-ago reported figure. AEO delivered an earnings surprise of 23% in the trailing four quarters.