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Gap shares surge 15 percent despite another monthly sales drop

A Gap store in New York.
Scott Mlyn | CNBC

Gap shares jumped more than 15 percent Friday, hours after the retailer reported September same-store sales that topped Wall Street's estimates — sort of.

The specialty apparel chain said comparable revenues declined 3 percent last month, which was in line with analysts' expectations. But excluding the impact of a fire in Gap's Fishkill, New York, distribution center in August, the metric would have been flat.

That adjusted figure marked an acceleration from the prior two months, as the Old Navy brand regained momentum. Meanwhile, with underlying trends at the Gap brand falling in line with August, some saw the namesake label's 5 percent decline as a signal it's starting to find a bottom.

Deutsche Bank analyst Paul Trussell upgraded the company's shares to "hold" from "sell," saying easier comparisons, cleaner inventories, a renewed interest in its staple denim category, and more seasonal temperatures should set the stock up for better performance in the near- to medium-term.

Even with Friday's surge, Gap shares are down nearly 20 percent over the past year.

"While questions around long-term door count and price competition from fast-fashion peers will continue, the setup is more favorable," Trussell said.

The Gap brand has struggled to regain relevancy with American shoppers, who tired of the label's uniform look. The slump has been even worse at the more upscale Banana Republic, whose attempt to go high-fashion fell flat with its working woman customer. So when its stalwart Old Navy brand started to falter late last year, many investors lost confidence in the company's turnaround.

Now, several analysts said they're seeing signs that management's plans are starting to take hold. Deutsche Bank's Trussell noted that the company has finally improved the fit and fashion of its products, which were two longstanding criticisms.

Merchandise margins were "significantly higher" than management originally forecast in September, thanks to leaner inventories and fewer markdowns, Citi analyst Paul Lejuez said. These improved margins "more than offset" the estimated earnings impact from lost sales and increased logistics costs from the Fishkill fire, the company said.

Meanwhile, ongoing store closings should help Gap cut costs moving forward, Trussell said. The company shuttered 128 stores in fiscal 2015, and dozens more are in the process of being closed.

Still, the brand faces challenges. Not only is it under pressure from internal miscues, but the growth of lower-price fast-fashion retailers continues to weigh on its results. Meanwhile, consumers have shown they're more interested in spending their cash on trips and entertainment than apparel.

The lingering impact of merchandise lost in the Fishkill fire is seen denting the company's comparable sales by 3 percentage points again in October, and a yet-to-be determined amount in the fourth quarter. And of course, even though trends are showing signs of life at Gap, the company has still reported negative comparable sales in 17 of the past 18 months.

That includes what would have been a 5 percent dip at Gap brand, and a 6 percent drop at Banana Republic.

"There remains a great deal of uncertainty regarding how Gap will weather [the Fishkill] challenge through the critical holiday season," Wells Fargo analyst Ike Boruchow said.