(Reuters) -Shares of Gap rose 19% 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.
Investors have responded positively to the company's third-quarter results announced on Thursday, even though Gap sees holiday-quarter sales below estimates and joined major retailers Walmart and Target in sounding a cautious note on spending, heading into the all-important shopping season.
However, all of these retailers and others have said that inventory levels have declined from last year's peak, which had been a significant overhang for the companies for several quarters.
Last year, sales at Gap's Old Navy brand had languished due to out-of-sync inventory, but attempts to get the right products on the shelf helped the brand's comparable sales rise 1% in the third quarter, the first increase in 10 quarters.
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.
Still, the apparel maker's executives alluded to a "longer recovery" time for its other brands Banana Republic and Athleta, which have seen "product misfires" and weak "retail execution".
"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.
Jefferies analysts said new Gap CEO Richard Dickson's prior experience in reinvigorating brands such as Barbie at Mattel could bring a lift to the Old Navy banner.
Shares of Gap have risen nearly 50% since late July after Dickson's appointment as hope of a turnaround under the new chief at the once sought-after brand remains high.
(Reporting by Ananya Mariam Rajesh in Bengaluru; Editing by Sriraj Kalluvila and Shinjini Ganguli)
