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Why Gap, Inc. Stock Jumped 25% in September

By Steve Symington - Oct 3, 2017 at 10:00AM

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The clothing store retailer skyrocketed after outlining a new strategic direction.

What happened

Shares of Gap Inc. (GPS 0.85%) climbed 25% in September, according to data from S&P Global Market Intelligence, as Wall Street applauded the clothing retailer's new long-term growth strategy.

More specifically, Gap stock first jumped 7.4% on Sept. 6, 2017, when the company announced plans to focus future growth on its outperforming Old Navy and Athleta brands, expand investments in its online and digital capabilities, and drive significant expense savings over the next three years. 

blue and white shirts hanging on a store display rack

Image source: Getty Images.

So what

Gap elaborated that it expects Old Navy and Athleta to exceed net sales of $10 billion and $1 billion in the next few years, with growth driven by a combination of online and mobile channels, continued market share leadership in loyalty categories, and U.S. store expansion. Regarding the latter, Gap Inc. also told investors it will close around 200 underperforming Gap and Banana Republic locations, while at the same time opening around 270 Old Navy and Athleta locations over the next three years.

Regarding its expense reductions, Gap Inc. believes it can find around $500 million in cost savings over the next three years "by better leveraging its size and scale, cross-brand synergies and streamlining operations and processes." Part of those productivity related savings will be reinvested in the company's growth initiatives, creating room for incremental margin improvements.

Perhaps unsurprisingly, Gap shares drifted higher in the weeks following its announcement, including another 6% pop on Sept. 12 as multiple analysts boosted their respective price targets on the stock.

Now what

To be clear, Gap is still operating in a difficult retail environment today. And the benefits of its strategic direction will take years to fully realize. But our market is a forward-looking machine, and it seems Gap is uniquely positioned to weather these tough times with its enviable portfolio of brands. As such, with Gap shares trading roughly flat year to date at the start of last month, it was hard to blame investors for so aggressively bidding up the stock in response.

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