Gap Stock Can Potentially Gain Another 30% Despite The Surge After The Kanye West Deal

Based on a comparison of Gap’s stock (NYSE: GPS) trajectory over recent months with that around the 2008 recession, we believe that the stock can potentially gain 30% to reach almost $16 once fears surrounding the coronavirus outbreak are put to rest. Notably, Gap stock has surged by more than 20% since June 25 after the company announced that it has entered into a deal with Kanye West’s Yeezy brand to introduce a new clothing line, Yeezy Gap. The Yeezy Gap line is expected to appear in Gap stores in FY 2021. We provide a detailed comparison of Gap’s performance vis-à-vis the S&P 500 in our interactive dashboard analysis, How Did Gap Stock Fare vs. The S&P 500 In 2008 And Now? 

The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued till February 19, with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. Gap stock lost 63% of its value (vs. about a 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price double in value over recent weeks (vs. about 39% gain in the S&P 500) to its current level around $12. Despite these gains, the stock is still down 30% since the beginning of the year.

Several Underlying Factors Triggered the Sharp Movements In Gap’s Stock

The decline in Gap’s stock is understandable, considering the impact that the outbreak and a broader economic slowdown are having on consumer spending and the global apparel industry in particular. The company’s first-quarter was wiped out due to the outbreak of coronavirus, which has forced people to stay indoors, resulting in a steep decline in the demand for the company’s products. Moreover, dwindling consumer demand reduced discretionary spending, and stay-at-home orders resulting in store remaining closed continue to take their toll on the company’s stock. The effects of Covid-19 were evident in the company’s Q1 2020 earnings (ending April), resulting in the company’s revenues plunging by 43% y-o-y to $2.1 billion. However, gradual store openings and the new deal with Kanye West have provided a boost to the company’s stock movement.

But How Does The Movement This Time Around Compare With The Trend During The 2008 Downturn?

• We see Gap stock declined from levels of around $13 in October 2007 (the pre-crisis peak) to levels of around $8 in March 2009 (as the markets bottomed out) – implying the company’s stock lost as much as 40% from its approximate pre-crisis peak – less than the broader S&P, which fell by about 51%.
• However, Gap stock recovered strongly post the 2008 crisis to about $16 in early 2010 – rising by 100% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period

Will Gap’s Stock Recover Similarly From The Current Crisis?

Keeping in mind the fact that Gap stock fell 63% from the market peak on February 19 to the low on March 23 compared to the 40% decline during the 2008 recession, we believe it can potentially recover by 30% to levels of $16 once economic conditions begin to show signs of improvement. This marks a near-complete recovery to the $17-level the stock was at before the coronavirus outbreak gained global momentum.

That said, the actual recovery and its timing 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 Coronavirus impact on a diverse set of Gap’s multinational peers – from Coronavirus and L Brands to impact on competitor Columbia Sportswear and Coronavirus on URBN stock. The complete set of coronavirus impact and timing analyses is available here.

While Gap is rebounding, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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