Gap Stock Almost Flat This Year, What’s Next?

GPS: Gap logo

Note: Gap’s FY’23 ended on February 3, 2024.

After almost staying flat year-to-date (YTD), at the current price of around $21 per share, we believe 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 appropriately priced. GPS stock has underperformed the broader indices, with the S&P growing about 5% over the same period. Gap’s sales have failed to pick up any traction in recent years. The company’s revenue fell 5% year-over-year (y-o-y) to $14.9 billion in 2023. But considering the revenue decline, the company’s gross profits have increased (8% y-o-y in 2023), which notes an uptick in profitability to $1.34 per share compared to a negative $0.55 per share in 2022. The consumer discretionary sector, and even more so the apparel industry, is highly cyclical and dependent on consumer spending which is, in turn, associated with consumer confidence. While consumer confidence in the U.S. has recovered from the Covid-19 pandemic lows, still confidence levels remain at lower levels compared to 2019 levels. In March 2024, the Consumer Confidence Index remained unchanged at 104.7, compared to the 104.8 level in February, indicating skepticism in consumers’ assessment of the present situation (for the short term).

In 2023, Gap’s cash and cash equivalents increased by 54% year-over-year (y-o-y) to $1.9 billion, while the company’s free cash flow improved to $1.1 billion from a negative $78 million last year. Its gross margin expanded by 530 basis points to 38.9% and the merchandise margin was up 500 basis points y-o-y. The company is generating better gross margins because it is being less promotional. In part, that is due to management’s resolution of its inventory problem (inventories down 16% y-o-y to $2 billion in 2023). The company was overstocked in 2022 because consumer spending slowed, so management cut prices to move products out. Overall, the company is seeing strong continued progress on margins and cash flow and also improved trends at its Old Navy and Gap brands.

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Gap’s comparable sales were down 2% in FY 2023. Segment wise, Old Navy, which makes up more than half of the company’s revenue, comparable sales were down 1%, with positive comp performance in the second half of the year, and market share gains in all four quarters. Gap brand saw a positive 1% comp for the full year 2023. The namesake brand is turning positive since underperforming locations have been closed. However, Banana Republic (comps down 7%) and Athleta (-12%) brands still continue to struggle. The positive here is that both Banana Republic and Athleta brands account for less than 20% of the total company business.

GPS stock has seen little change, moving slightly from levels of $20 in early January 2021 to around $21 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. Overall, the performance of GPS stock with respect to the index has been quite volatile. Returns for the stock were -13% in 2021, -36% in 2022, and 85% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that GPS underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GPS face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?
We forecast Gap’s Revenues to be $14.8 billion for the fiscal year 2024, down marginally y-o-y. We now forecast earnings per share to come in at $1.40. Given the changes to our revenues and EPS forecast, we have revised our Gap’s Valuation to $21 per share, based on a $1.40 expected EPS and a 15x P/E multiple for the fiscal year 2024 – in line with the current market price. That said, the company’s stock appears appropriately priced right now. We believe that macroeconomic uncertainties will likely not bode well for discretionary spending in the near term.
In FY 2024, Gap calls for roughly flat net sales while delivering low to mid-teens operating income growth and at least a 50 basis point gross margin expansion. The company expects Old Navy and Gap brands to continue to perform well in FY’24. At the same time, Athleta will struggle in the first half of the year because of the brand’s elevated discounting from 2023 and Banana Republic will take longer to recover. For Q1, the company expects sales to be flat from $3.3 billion in Q1 2023, and gross margin to expand by 100 basis points from 37.2% in the same quarter last year.

It is helpful to see how its peers stack up. Check out how Gap’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Apr 2024
MTD [1]
YTD [1]
Total [2]
 GPS Return -24% 1% -6%
 S&P 500 Return -5% 5% 124%
 Trefis Reinforced Value Portfolio -7% -1% 606%

[1] Returns as of 4/19/2024
[2] Cumulative total returns since the end of 2016

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