Down 50% Since January, Is Gap Stock Oversold?

by Trefis Team
-31.35%
Downside
11.65
Market
8.00
Trefis
GPS
Gap Inc.
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After almost a 52% decline in Gap’s (NYSE: GPS) stock since the beginning of this year, we believe that Gap’s stock is likely oversold at the current price of $8 per share and it has a significant upside. The key is Gap’s stock is still 66% lower than it was at the beginning of 2019 and over 73% lower than it was at the starting of 2018, a little over two years ago. Our dashboard, ‘What Factors Drove -73.1% Change In The Gap Inc. Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of the stock price decline over the last 2 years is justified by the roughly 60% fall seen in Gap’s net income margin from 5.3% in 2017 to 2.1% in 2019. This decline was partially offset by a 4.3% reduction in share count due to stock repurchases worth $600 million made over the same time period. Overall, Gap’s earnings per share basis plunged more than 57%, which led to a decline in the company’s stock price. Notably, though, the company’s revenues have seen a marginal 3.3% growth between 2017 and 2019.

Shrinking earnings figures have led to a sizable drop in Gap’s P/E multiple – from 14.4x at the end of 2017 to 10.3x by the end of 2019. Moreover, Gap’s P/E is down to about 9x now, given the volatility of the current situation. This reflects a 38% decrease in P/E multiple from December 2017 to March 2020. We believe there is a potential upside for Gap’s multiple when compared to levels seen over recent years – P/E of 19x at the end of 2019, and 14x as recent as in late 2017.

 

How Is Coronavirus Impacting Gap’s Stock?

The Coronavirus crisis has hit the apparel industry hard. 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. Notably, the company derives nearly 80% of its revenues from the US, which has become the new epicenter of the outbreak – recording the largest numbers of COVID-19 cases across the globe. Moreover, people are just not going out to shop for luxury or even basic apparel. In addition to store closures, the company has furloughed a majority of its store teams in the United States and Canada. In its Q4 2019 earnings (ending January), Gap anticipated its Q1 2020 results to be negatively impacted by approximately $100 million in sales. However, we believe the impact could be much higher as the outbreak spreads.

Although Gap’s revenues are likely to witness a steep fall in 2020, the company has taken some strong measures in cutting costs that could help the company preserve its profits. If there are early signs of abatement of the crisis, the company’s stock could see a modest uptick. Going by historical trends, we believe that the company’s stock is currently oversold and offers potential upside returns.

 

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. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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