Can Gap Survive The COVID-19 Recession?

by Trefis Team
Gap Inc.
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Gap’s (NYSE: GPS) stock has declined by 50% since the beginning of the year. The apparel industry is rattled, and Gap is no exception. A COVID recession will impact the company’s revenues, cash flows, and ability to pay dividends. We estimate that a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 40% from $16.4 billion in 2019 to $10 billion in 2020. Gap has taken a string of measures to preserve its profitability and cash reserves, including reducing capital expenditures, suspending/delaying payments of dividends, and temporarily furloughing its employees. Gap has also suspended rent payments for its stores that have been closed because of the COVID-19 pandemic. Gap’s cash flows have been adversely impacted, and the company could be headed for a cash crunch if the condition deteriorates.

Trefis analyzes the Impact Of The COVID-19 Recession On Gap in an interactive dashboard with a focus on Gap’s liquidity reserves and concludes that a COVID-19 recession could wipe off more than $1 billion of Gap’s cash reserves in FY2020.


Impact On Gap’s Revenues 

  • If the outbreak of the virus increases, Gap will have to keep its stores closed until the situation improves. As a result, Gap’s revenues could decline by about 40% in FY’20, on account of weaker demand, reduced mall traffic, potential supply constraints, and a reduction in discretionary spending.
  • Gap has more than 2,500 stores across North America, and retail (store) sales account for nearly 75% of the company’s revenues.
  • In addition to that, 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.


Impact On Gap’s Cash Flows

Gap’s cash flows are likely to plunge in FY2020 due to a steep fall in revenues and reduced profitability.  The company will have to offer merchandise at a deep discount to clear out the existing inventory. Elevated fixed costs, coupled with lower revenues, will hurt the company’s bottom line. However, Gap has taken a number of measures to mitigate the impact on its cash balance by announcing a $300-million reduction in capital expenditures, suspending share repurchases, and eliminating dividends. Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $1.4 billion in 2019 to -$0.8 billion in 2020. Also, with expected capital expenditures of $300 million for the year, FCFO-CapEx will be -$1.1 billion in 2020.

Cash Balance Impact

  • This will lead to a 2020 cash balance of $1.1 billion, which is lower than compared to 2019. This balance includes $500 million, which Gap has withdrawn from its revolving credit facility.
  • While the decision to stop share repurchases and discontinue paying dividends may be a disappointment for existing investors, these moves by the company are essential for its long-term survival.



To sum things up, Gap can weather a recession through Q3/Q4 and a 40% decline in revenues by cutting Capex, share repurchases, suspending dividends, and raising $500 Million in the capital.

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.

For an alternative scenario with a 20% change in revenue instead, see our full analysis.


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