Shares of Gap surged 20% in premarket trading on Friday as investors cheered signs that the apparel maker's efforts to bring in trendier and in-demand clothing at its Old Navy brand and keep inventory under control were paying off.
Last year, like Walmart and Target, Gap discounted heavily to clear excess stocks due to weaker demand for non-essential products and aggravated by out-of-style clothing at the company's brands.
Reported quarter results were "driven by improvement at Old Navy and leaner inventory, and, encouragingly, November to-date sales trends have improved modestly from the third quarter," Telsey Advisory Group analysts said in a note.
Comparable sales at Old Navy rose 1% in the third quarter, the first increase in 10 quarters.
"Old Navy gained market share, an encouraging early proof point that work to improve both product assortment and brand messaging" were driving results, Gap Chief Financial Officer Katrina O'Connell said on Thursday following the earnings.
Gap's struggles with outdated inventory at its namesake brand and Old Navy had pushed customers to look for newer and fresher styles at rivals like Shein and Amazon.com.
Jefferies analysts said new CEO Richard Dickson's prior experience in reinvigorating brands like Barbie at Mattel could bring a lift to the Old Navy banner.
However, Gap forecast bleak fourth-quarter sales and said it was "mindful of the uncertain consumer environment" that has strained spending over the last year.
The apparel maker's executives also alluded to a "longer recovery" time for Banana Republic and Athleta, which has seen "product misfires" and weak "retail execution".
(Reporting by Ananya Mariam Rajesh in Bengaluru; Editing by Sriraj Kalluvila)
