Today's surge in Gap Inc.'s stock price.

The shares of clothing retail giant The Gap (GAP) saw a boost on Friday, following the company's financial report for the third quarter of 2024. As of 11:30 a.m. ET, the company's stock was up approximately 9%, although it had climbed as high as 18% earlier in the day.

Gap's earnings soaring

The main takeaway here is that Gap's Q3 earnings surpassed investor expectations significantly. Despite a modest 2% increase in net sales, investors were pleased to see growth across most of its brands, with Athleta chain reporting a 5% growth in same-store sales. While this growth was noteworthy, it was relatively less impressive compared to the improvement in profitability.

Gap's Q3 gross margin slightly exceeded its forecast, resulting in a substantial improvement in its operating profit. The Q3 operational margin for Gap was 9.3%, marking its best performance in nine years and boosting operating income by a notable 42%.

With a P/E ratio of around 11 prior to the Q3 report release, Gap stock was already considered as undervalued. But with profits increasing rapidly, investors are seizing the chance to invest in what they perceive as an underestimated opportunity.

The holiday shopping season looks promising

Several analysts increased their target prices for Gap stock today, likely due to optimistic remarks from the management. CEO Richard Dickson stated that the "holiday shopping period is off to a strong start". This optimism led to the increase of the company's full-year operating income guidance.

Investors stand to benefit from Gap's improved profit margins, as it indicates a decrease in discounted merchandise. This reduction is a result of the company's improved inventory management. Going into the holiday season, inventory levels are lower than they have been in a while. Continued progress in this area could further support higher profits, which is good news for investors.

The positive financial performance of Gap has opened up opportunities for investors looking to finance their portfolios. With profitability improving and the company's stock considered undervalued, investing in Gap could potentially yield high returns.

Following the impressive Q3 earnings report, several analysts have raised their target prices for Gap stock, indicating a positive outlook for the company's financial future, particularly during the upcoming holiday shopping season.