Why Market Isn’t Buying Gap’s Turnaround Story
Note: Gap’s fiscal year ended February 1, 2025
Despite a stronger-than-expected Q1, investors are steering clear of Gap Inc. stock (NYSE: GAP) — and for good reason. While the stock looks cheap on the surface, with valuation metrics far below the broader market, deeper issues are weighing on sentiment: renewed tariff risks, flat forward guidance, and shaky consumer confidence. The result? A 6.1% slide on July 14, even as the S&P 500 eked out a 0.1% gain and peer Guess (NYSE: GES) dipped just 1%. For those seeking steadier long-term growth, diversified strategies like the Trefis High Quality portfolio have returned over 91% since inception and offer a smoother ride.
Separately see, As Recalls Pile Up, What’s Next For Ford Stock?
- AEO’s One-Day Rally Offers a Chance to Reevaluate GAP
- How Will Gap’s Stock React To Its Upcoming Earnings?
- Big Move for AEO, but Do GAP’s Margins and Growth Give It the Edge?
- The Next Big Rally in Ford Motor Stock Could Start Like This
- The Risk Factors to Watch Out For in NVIDIA Stock
- Intuitive Surgical Stock Now 16% Cheaper, Time To Buy
What’s Weighing on Gap?
The selloff followed a brief post-earnings rally, but optimism faded quickly. In its Q1 report, Gap confirmed full-year gross tariff costs of $250–$300 million, with $100–$150 million hitting the bottom line even after mitigation. That risk became more real after recent court rulings cleared a path for the reinstatement of Trump-era tariffs. On top of that, Gap guided for flat revenue in Q2, a red flag for a company trying to prove it has turned the corner.
Consumer Confidence: A Weak Link
Consumer sentiment, a key driver of apparel demand, is weakening. The U.S. Consumer Confidence Index fell to 93.0 in June, down from 98.4 in May and well off its pre-pandemic level of 132.6 in February 2020. Fewer Americans expect improvements in the labor market (15.4%, down from 18.6%) or business conditions (16.7% vs. 19.9%), signaling a softening spending environment.
Q1 Snapshot: Solid, But Not Without Cracks
In Q1 (ended May 3, 2025), Gap posted a 2.2% year-over-year revenue increase to $3.46 billion and earned $0.51 per share, up 24% and ahead of estimates. Gross margin expanded to 41.8%, while operating margin rose to 7.7%, driving net income up 22% to $193 million. Comparable sales climbed 5% at the Gap brand and 3% at Old Navy, but Banana Republic saw flat comps, and Athleta comps fell around 8%. Online sales rose 6%, now comprising 39% of revenue. Despite holding nearly $2 billion in cash, the company posted negative free cash flow of $223 million, reflecting typical seasonal trends. Gap reaffirmed full-year guidance for 1–2% revenue growth and 8–10% operating income growth, excluding the expected tariff drag.
Valuation: Bargain or Value Trap?
Gap trades at a steep discount to the broader market, with a price-to-sales ratio of 0.6 (vs. 3.1 for the S&P 500), price-to-free cash flow of 9.9 (vs. 20.9), and price-to-earnings of 9.4 (vs. 26.9). While those figures suggest a bargain, they also mirror investor skepticism over the company’s fundamentals and long-term growth potential.
Growth & Profitability: Mixed Signals
Over the past three years, Gap’s revenue has declined at an average annual rate of 2.1%, compared to the S&P 500’s 5.5% gain. Sales have remained flat over the past year, and Q1’s 2.2% revenue growth remains modest. Profitability continues to lag peers, with an operating margin of 7.7%, a net margin of 5.8% (vs. 11.6% for the S&P 500), and an operating cash flow margin of 8.7% (vs. 14.9%). While operational execution is improving, Gap remains far behind industry leaders.
Gap’s balance sheet is adequate but not pristine. The company carries $5.5 billion in debt against an $8 billion market cap, resulting in a debt-to-equity ratio of 63.4%, which is more than triple the S&P 500 average. On the bright side, a healthy 19.2% cash-to-assets ratio provides a cushion as the company weathers cost pressures and ongoing brand transformation.
Bottom Line
Yes, Gap looks cheap. But it’s cheap for a reason. The Q1 beat is encouraging, but investors are rightly cautious in the face of tariff risks, tepid guidance, inconsistent brand performance, and a weakening consumer backdrop. Until fundamentals improve more broadly, the discount may remain.
Investing in a single stock can be risky. For those looking for growth with lower volatility, diversified portfolios like the Trefis High Quality portfolio offer a compelling alternative. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Invest with Trefis Market-Beating Portfolios