Gap (NYSE: GPS) stock has declined by close to 55% since early February after the WHO declared the Coronavirus a global health emergency, while Abercrombie & Fitch (NYSE: ANF) stock has fared slightly better and lost 31% of its value. The lockdown in various parts of the world has had a negative impact on the apparel industry worldwide, with more weakness to come over the coming months. The companies have had to temporarily shutter their stores and it remains unclear as to when they can open them again, as the pandemic continues to spread, particularly in Europe and the U.S., which are the largest markets for apparel companies. However, we believe Abercrombie will likely fare better than Gap because of its geographical diversification, better inventory management, and limited retail exposure to the US. As of 2019, Gap was deriving more than 80% of its revenues from the US while the contribution of the US to Abercrombie’s revenues was lower at 66%. Since the US has become the new epicenter of the outbreak with the country recording the largest numbers of COVID-19 cases across the globe, we believe that Gap would be the worse hit. In addition to that, Gap is one of the largest retailers with more than 2,500 stores across North America while Abercrombie has around 850 stores, as a result, we believe Gap’s revenues are likely to be severely impacted. Moreover, Gap was holding larger inventory at the end of FY’19, this will likely put pressure on the company’s margin as it is likely to run an intense promotional campaign to liquidate its existing inventory.
Our conclusion is based on our detailed dashboard analysis, ‘Is Abercrombie & Fitch Expensive Or Cheap vs. Gap Inc.?’ wherein we compare trends in key metrics for the two apparel companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.
Why Has Abercrombie Outperformed Gap Over Recent Weeks?
Abercrombie’s P/E based on 2019 earnings has declined from 28x in 2019 to 18x currently, while Gap’s multiple has declined from 19x to about 8x. The steeper decline in Gap’s multiple can be attributed to the difference in their geographic diversification and better inventory management as highlighted above.
However, Gap’s multiple still appears high, considering that the company’s revenues and margins are at a greater risk compared to Abercrombie’s. Notably, Abercrombie’s P/E is at around the lowest level seen in at least 6 years (similar to its 2018 levels). On the other hand, Gap’s P/E is also trading at the lower end of the spectrum but the stock seems to be more vulnerable- indicating that any negative news could result in the figure shrinking 20% to around 6.5x.
Overall, it’s likely that Abercrombie stock will continue to outperform Gap, which will likely see its P/E multiple shrink further when the ground reality is confirmed during its fiscal Q1 results.
But How Long Will Gap Stock Remain Under Pressure?
- The expected timeline for recovery in global economic conditions, and in Gap’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
- Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Gap’s multinational peers, including Urban Outfitters and American Eagle. The complete set of coronavirus impact and timing analyses is available here.
- We believe there will be a recovery in demand for most sectors by late May/early June, with the gradual lifting of lockdowns and a gradual rise in the number of COVID-19 cases remaining within the manageable capacity of hospitals and care providers.
- Although most companies will report poor results starting mid-July, market expectations will be buoyed by a visible improvement in the situation on the ground.
Our related analysis ‘Is Lululemon Athletica Expensive Or Cheap vs. Nike?’ provides insight into why Nike Is A Better Bet Than Lululemon in the ongoing pandemic.