What happened
Shares of apparel company Gap (GPS -1.28%) popped on Friday after it reported its latest quarterly financial results. As of noon ET, Gap stock was up 10%.
So what
Gap owns several retail brands, including Old Navy, Banana Republic, and its namesake brand. On a consolidated basis, the company's net sales for the fiscal first quarter of 2023, which ended in April, dropped 6% year over year to about $3.3 billion. This number was expected.
Largely thanks to some improvement to its gross profit margin, Gap's net income greatly improved in Q1 compared to the same quarter of last year. In Q1, it had a net loss of $18 million, whereas its net loss was $162 million last year. And on an adjusted basis, Gap squeaked out a profit, which was better than the market expected and led to today's pop.
Now what
To me, Gap's financial results were similar to those of other apparel stocks this quarter. So, on the one hand, I wouldn't get too excited. On the other hand, the market is right to applaud the company's improving profitability. Management reduced inventory by 27% year over year while growing its gross margin. And it can be hard to do both at the same time.
Looking ahead to the rest of 2023, Gap expects much of the same -- modestly declining sales with modestly improving margins. If that happens, then the stock likely has little downside from current levels. However, without better growth, the stock may not have much upside either.
As a final note, Gap is looking for a new CEO right now. And since management's guidance for the year doesn't imply much upside, it might not be a bad idea to wait on the sidelines for now until a new leader is named.
