More Gains Left For Gap’s Stock?

GPS: Gap logo

[Updated: 09/30/21] GPS Stock Update

Gap Inc. (NYSE: GPS) recently released its Q2 report, wherein revenues came in 2% below and earnings per share (EPS) were a large  40% above our estimates. The company’s revenues grew a strong 28% year-over-year (y-o-y) to $4.2 billion, driven by an easy comparison to last year. That said, the company’s revenue was also 5% above pre-pandemic levels from Q2 2019. Old Navy and Athleta sales were up 21% and 35%, respectively, from the comparable pre-Covid quarter while Gap and Banana Republic brand sales declined compared to 2019. In addition, the retailer’s gross margin expanded 440 bps from 2019, driven by leverage from a 65% growth in online sales (vs 2019) and expense reduction due to store closures. Further, the company also announced its acquisition of Drapr, an online application startup that lets customers design 3D avatars and virtually try on clothing.

For the fiscal year 2021, Gap raised its full-year guidance and now expects sales to grow by about 30% versus 2020. It estimates operating margin to come in at about 7% and earnings per share to fall in the range of $1.90 – $2.05 for the full year. To add to this, the company also expects to open 50-70 Old Navy and Athleta stores while closing about 75 Gap and Banana Republic stores in 2021, in order to capitalize on the shift in consumer brand tastes. We have updated our model following the fiscal Q2 release. We now forecast Gap’s Revenues to be $17.8 billion for fiscal 2021, up 29% y-o-y, compared to a prior forecast of a 24% y-o-y growth in revenues. We also expect EPS to come in at $1.97, up from a loss of $1.78 last year, compared to our prior estimate of $1.78. Given the changes to our revenues and earnings forecast, we have revised our Gap’s Valuation at $30 per share, based on $1.97 expected EPS and a 15x P/E multiple for fiscal 2022 – 19% higher than the current market price. The company’s stock is up 28% year-to-date.

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[Updated: 08/24/21] GPS Q4 Pre-Earnings

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, is scheduled to report its fiscal second-quarter results on Thursday, August 26. We expect Gap stock to trade higher due to better-than-expected fiscal Q2 2021 results with revenues and earnings beating consensus. While the retailer saw a serious sales drop in 2020, it has shown encouraging signs in 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 (y-o-y) and even exceeded 2019 levels by 8%. The company also boosted its annual sales forecast and now expects top-line growth to exceed 20%. Having said that, the company’s digital transition and cost-cutting initiatives are looking good for the company’s long term prospects. Our forecast indicates that Gap’s valuation is $32 per share, which is 12% higher than the current market price of around $28. Look at our interactive dashboard analysis on Gap’s Pre-Earnings: What To Expect in Q2? for more details.

(1) Revenues expected to come ahead of consensus estimates

Trefis estimates Gap’s FQ2 2021 revenues to be $4.2 Bil, 3% ahead of market expectations. In Q1, the company’s comparable sales increased 28% y-o-y and 25% over 2019. In addition, its digital sales grew 82% y-o-y, which also made up 40% of its total sales mix. The company’s gross margin rose 450 basis points (bps) compared to a year ago to 40.8% – driven by online growth, store closures, and rent negotiation. As usual, Old Navy and Athleta brands posted the company’s best performances, growing their comparable sales 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%. It should be noted that Old Navy and Athleta make up a combined 66% of the total revenue, and the company aims to increase that number to 70% by 2023 as part of its ambitious Power Plan to restructure its brand makeup and build strategic partnerships.

For full-year 2021, we expect Gap’s revenues to grow 24% y-o-y to $17.1 billion.

2) EPS likely to be above consensus estimates

Gap’s FQ2 2021 earnings per share (EPS) is expected to be $0.48 per Trefis analysis, 12% higher than the consensus estimate of $0.43. In Q1, the company’s earnings per share came in at $0.43, vs. a $2.51 loss last year. 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.

(3) Stock price estimate higher than the current market price

Going by our Gap’s Valuation, with an EPS estimate of $1.78 and a P/E multiple of 17.8x in fiscal 2021, this translates into a price of $32, which is 12% higher than the current market price of roughly $28.

It is helpful to see how its peers stack up. GPS Stock Comparison With Peers to see how Gap compares against peers on metrics that matter.

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