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Why Gap Stock Jumped 24% in November

By Demitri Kalogeropoulos - Dec 5, 2017 at 5:09PM

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Investors were surprised by the retailer's improving operating trends ahead of the holiday shopping season.

What happened

Shares of clothing retailer Gap (GPS 3.03%) gained 24% last month, according to data provided by S&P Global Market Intelligence, compared to a 2.8% increase for the broader stock market.

^SPX Chart

Data by YCharts.

The rally put shareholders in solidly positive territory for the year -- up 49% compared to the market's 18% bounce. Yet Gap is still significantly trailing the market over the past three-year and five-year periods.

So what

November's spike was driven by solid quarterly earnings results. Gap revealed on Nov. 16 that third-quarter comparable-store sales rose 3% to mark an improvement over the prior quarter's 1% uptick. The comps gain marked Gap's fourth consecutive quarter of expansion.

A busy shopping mall.

Image source: Getty Images.

Gap outperformed on the profit side as well, with gross profit margin increasing for the fourth straight quarter.

Now what

The profitability and sales growth trends led Gap executives to raise both their top- and bottom-line forecasts for the year. They now see comps rising in the low single digits, versus the flat target management had issued back in August. And while that's not a particularly robust growth pace, it would mark the retailer's first positive annual comps result in over three years.

That streak had led investors to push Gap's valuation to below 10 times earnings, which set the stage for the recent dramatic increase on news that the business is making good progress on its turnaround plans.

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