Gap Stock Up 60% YTD, Time To Sell?

-10.78%
Downside
10.65
Market
9.50
Trefis
GPS: Gap logo
GPS
Gap

Gap Inc. stock (NYSE: GPS), a specialty retailer selling casual apparel, accessories, and personal care products for men, women, and children under the Gap, Old Navy, and Banana Republic brands, increased by almost 63% from the beginning of 2021 (at $20) to $33 per share currently. The retailer saw a serious sales drop in 2020 but has shown encouraging signs in the recent Q1 as vaccine rollouts gained steam. In fact, Gap’s total sales in the recent first quarter were up a large 89% year-over-year and even exceeded 2019 levels by 8%. In addition, its comparable sales increased 28% y-o-y and 13% over 2019. So does GAP stock still look attractive at current levels? We don’t think so.

The Gap brand has failed to resonate with customers for years, and this division accounts for a large 25% of total sales. The company has planned to close 350 Gap and Banana Republic locations by 2023, 75% of them by the end of 2021. But store closures may only provide some margin relief in the near term, as they don’t represent a permanent solution. In addition, an increased digital business will also likely continue to weigh on its profitability. All this indicating that the apparel retailer could likely get back to its slower pace of growth once the Covid threat completely abates. To give some perspective, Gap’s revenue declined marginally in fiscal 2019, as compared to a 4% growth in the previous year. Our dashboard, Why GPS Stock Gained 30% Since 2018? provides the key numbers behind our thinking, and we explain more below.

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Gap’s stock price declined around 20% from $25 in fiscal 2018 to close to $20 in fiscal 2020. Obviously, the company’s stock hasn’t been a great investment over the past three years as the styles have fallen out of favor, and the store closures early during the pandemic only added to the company’s woes. The apparel retailer saw a 17% decline in revenues during this period, driven by solid results from the Old Navy brand and high growth from the Athleta women’s activewear brand, more than offset by weak progress from both The Gap and Banana Republic chains (which were the height of popular fashion in their heydays).

Finally, Gap’s P/S multiple has declined from 0.6x in fiscal 2018 to 0.5x in 2020. While the company’s P/S has now increased to 0.9x, there is a downside risk when the current P/S is compared to levels seen in the previous years.

How Is Coronavirus Impacting GPS Stock?

In the company’s fiscal first quarter, which ended in April, digital sales grew 61% y-o-y, which also made up 40% of its total sales mix. As usual, Old Navy and Athleta brands posted the company’s best performances, growing by 27% and 56%, respectively, as compared to the first quarter of 2019. However, Banana Republic’s sales fell 29% and The Gap brand’s sales declined 16%. Thanks to its strong first-quarter results, Gap lifted its full-year adjusted EPS guidance to a range of $1.60 to $1.75, up from $1.20 to $1.35 previously. The company also boosted its annual sales forecast and now expects top-line growth to exceed 20%.

At Gap’s investor day, the management set a goal of growing Old Navy’s annual sales to $10 billion and Athleta’s annual sales to $2 billion by fiscal 2023. If these brands hit their growth targets, they’ll account for about 70% of Gap’s sales by 2023, up from 55% in 2020. Although the company seems to have taken steps in the right direction, everything will hinge on its ability to maintain its sales levels post-Covid. For now, there seem to be too many potential stumbling blocks.

For further comparison among peer groups, it is helpful to see how they stack up. GPS Stock Comparison With Peers shows how Gap compares against peers on metrics that matter.

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