Denim made its return this summer to Gap Inc. and American Eagle Outfitters, Inc.’s window displays. Fueled by viral ad campaigns, the once-faded brands have been riding a three-month stock surge, defying a fickle retail market and tariff worries.
Gap stocks have risen 7.37% since June 25, closing at $22.87 on Sept. 24. American Eagle had an even higher rise of 87.04% and closed at $17.90, while the S&P 500 has risen 8.95% since June over the same period.
This three-month rise has been fueled by a revival in denim, brought on by viral campaign ads featuring popular celebrities like the global girl group, Katseye, Parker Posey and Sydney Sweeney, as well as efficiency changes, which have guided these stores to navigate an uncertain period for retail because of tariffs and tricky consumer trends.
“There was a lot of concern about the effect of the tariffs and how that would affect apparel companies like Gap and it is likely to affect the margins [but] the company said that on the last call it hasn’t had a big impact so far,” said David Swartz, a senior equity analyst at Morningstar.
Gap and American Eagle Performance Against the S&P 500 Since June
Additionally, Gap has “been doing some good things after many years of struggles,” according to Swartz, such as a C-suite overhaul.
Richard Dickson joined the company in 2023 and is credited with revitalizing the Barbie franchise at Mattel during his tenure as president and CEO. His leadership has created a period of steadiness over the last two years for Gap, which has resulted in the company’s three largest divisions: Old Navy, Gap and Banana Republic reversing a decline in sales.
In the second quarter of this year, which lasted from April to June, Gap as a whole had a 1% increase in comparable store sales.
“It’s been a sort of a long period of decline for Gap, but since Richard Dickson came in as CEO two years ago, there’s been a lot more enthusiasm about it than there has been in a long time,” said Swartz. “The company’s been sort of a revolving door of CEOs in the past, so it seems to have had stability recently.”
A resurgence in denim products like jeans, crop vests and jackets has been pushed by recent ads. American Eagle released an ad called “Sydney Sweeney Has Great Jeans,” which is a play on genes. It quickly became a controversial topic of debate online, but led to the company’s stocks having record-breaking closes, surging on Sept. 17, closing at $19.88. Search results on Google increased for both over the past 90 days.
Gap’s Katseye “Better in Denim” ad, which appeals to Millennials with the 2003 hit song, Milkshake by Kellis, has also played a contributing factor to the company’s stocks rising.
For many online, Gap’s ad has resonated with them.
“I think Gap’s Katseye ad showcased their product better [in terms of] design and mobility, had massive reach and popularity with people across all ethnic groups, and seemed to especially resonate with young women,” said a trader who goes by the name Spy-der on Reddit. “I think these are the makings of an ad campaign that effectively reshapes brand identity and develops a customer base with loyalty.”
However, the question remains of whether these trends and ad campaigns can continue to help these companies in the long term, with the effects of tariffs and a weakening economy.
A poor jobs report release from the BLS on Sept. 12 saw Gap stocks plummet from $24.23 to $22.90 and American Eagle from $19.61 to $18.34. With job growth slowing and consumer sentiment at a low, shoppers often begin to shift from discretionary spending.
For Gap, the company may offset some pressure on its margins due to the holidays, as November and December are when sales peak, according to a report by Mark Altschwager, a senior research analyst at Baird.
If, however, these companies raise prices, consumers may start to look at their competitors for cheaper options, which will cut into sales.
Analysts like Swartz believe that Gap stock has been “undervalued a lot in the past” and even currently. But according to his report, Dickson has made Gap relevant again as the company can grow a little each year while keeping a “7%-8% operating margins in the long term.”
“Gap has a good balance sheet, doesn’t have any debt maturities in the near future, it has a lot of cash,” said Swartz. “Gap has been struggling for many years, but it’s also not in any danger of any financial distress.”
Gap has recently started to expand with beauty products and if Old Navy, one of the company’s biggest brands, can stay consistent with positive sales as well as a rebound from Athleta, it will have a path. If American Eagle can continue to capitalize on the current momentum of denim and viral ads into the fourth quarter, it can continue to weather the market’s volatility.
But, with everything however, the future is uncertain. Tariffs, the effects which have been delayed because of the pauses, may not show until December.
“The outlook for every apparel retailer right now is a little bit uncertain,” said Swartz. “With the tariff situation, nobody really knows what’s going to force companies to raise prices and then that could hurt demand going into the holiday season, but at this point, nobody really knows for sure.”