Gap stock soars on Q4 earnings beat: Key takeaways

The Gap (GPS) reported fourth-quarter results, that beat analyst estimates on both the top and bottom lines. The retail company reported revenue of $4.3 billion, exceeding expectations of $4.21 billion. Furthermore, Gap's adjusted earnings per share came in at $0.49, outpacing analysts' projections of $0.23 per share.

Yahoo Finance's Brian Sozzi breaks down the details of the earnings report and his conversation with the new Gap CEO Richard Dickson.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

[LOGO AUDIO]

- Gap just out with its fourth quarter earnings, and, boy, did those earnings beat. $0.49 a share versus the $0.23 that analysts had been estimating here. Gross margin coming in at 38.9%, which is way above estimates as well.

And you got to talk about comparable sales when you talk about Gap here. Fourth quarter total comps flat, but there was an estimate for a drop in those comparable sales. Old Navy sales, on a comparable basis, up by 2%. The company does say that first quarter net sales will be roughly flat.

So we're still going through the numbers here, but we want to bring in our own Brian Sozzi, who has been a longtime Gap watcher, I think it's fair--

BRIAN SOZZI: A critic?

- --to say.

BRIAN SOZZI: A critic?

- Yes, indeed, . And you talked to the-- the still relatively newish CEO.

BRIAN SOZZI: Yes, correct. So if you're looking at these numbers after hours, trying to gauge where this company is in a turnaround, you probably want to look at two things. First, comparable sales at the Old Navy division up 2%. This is the largest chain inside of the Gap portfolio. As Old Navy goes will-- so will Gap's stock price.

Go further down the press release, guys. Gap comparable sales up 4% versus minus-- [? a minus ?] 4% decline or decline last year. Gross profit margins up 430 basis points, or BIPS, if you want to sound cool, year over year. That's a big, big gain in large part because they've pulled back on promotions. They've got their inventories down year over year. Another retailer showing inventory declines.

Now what stood out to me, and I put this to Gap's new CEO, Richard Dickson, who I originally met at Mattel when he was COO, who reinvigorated the Barbie brand, I'm like, man, hey, I've not seen a shout-out to market share gains for Gap maybe in over 10 years of covering this company. I can't remember it. And he told me that they are, in fact, seeing signs-- very early, early signs-- of a turnaround. Keep in mind, Richard just started about six months ago. Just started to fill out his leadership team. Just tiny, baby signs of a turnaround.

He also acknowledged to me that a turnaround isn't going to happen overnight. A lot of the problems that the company has, that have been self-inflicted, haven't happened overnight. They've been-- this has been going on for 10 or 15 years in some cases, inefficiencies in the supply chain, fit has been a problem, product quality, and even just the look of the product.

But right now there's teensy signs of a turnaround at Gap. But, again, there's a lot more proving they need to do

- All right. I got a question for you. How do you solve a problem like Athleta?

BRIAN SOZZI: Mm-hm.

- Down 12% comp sales.

- Against what Lululemon is doing.

- And, listen, I say this as a person with some Athleta in the closet.

BRIAN SOZZI: Well--

- [INAUDIBLE]

BRIAN SOZZI: --they have put in all new leadership inside of Athleta. So typically in retail it takes two to three quarters to get out the products, and the merchandising, and the marketing from a new leader, from a bunch of new leaders. That will hit. You got a taste of it a little bit. If you surf around Athleta on LinkedIn, notably through Richard Dickson's LinkedIn profile, you can see some of the new items starting to hit. I believe they just launched the Train collection. It looks like a lot of stuff that's--

- What collection?

BRIAN SOZZI: Train. T-R-A-I-N. Very simple.

- Like training.

BRIAN SOZZI: Training, yes, Train. Important, it looks like Lululemon. And that's a good thing, because Lululemon is doing good. So if Athleta could better compete with Lululemon, that is ultimately a good thing.

But Athleta is not going to move this stock. They have to--

- Right. It's still a small part of [? their business. ?]

BRIAN SOZZI: They're going to have to shrink the store base. Now Richard told me, I wouldn't expect some form of investor day near-term, and where they announce hundreds of store closures. Maybe that's a year from now. Unclear to me. But I think they have to get some of these store bases under control.

- Yeah.

BRIAN SOZZI: They have over, what, 1,200 Old Navy stores? They have to bring that down.

- Sozz, thanks a lot.

BRIAN SOZZI: It's great to be here.

- Fun to talk to you about Gap again.

BRIAN SOZZI: Yep.

- It's like old times.