Note: Gap’s
GPS
After almost a 67% increase year-to-date, at the current price of around $19 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 increased from around $11 to $19 YTD, largely outperforming the broader indices, with the S&P growing about 19% over the same period. Gap saw a new permanent CEO in late August after being without one since the summer of 2022. In addition, Gap also saw better-than-expected Q3 results, which led to this stock rise. The company’s revenue fell 6% year-over-year (y-o-y) to $3.8 billion, beating the market expectations by $190 million. Its bottom line fell 23% y-o-y to $0.59 but beat consensus estimates by 39 cents. The retailer’s Q3 gross margin of 41.3% was a 260 basis point improvement compared to the same period last year – adjusted for the impairment of the Yeezy business in 2022. 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 22% y-o-y in Q3). The company was overstocked last year because consumer spending slowed, so management cut prices to move products out.
It should also be noted that Gap’s comparable sales declined 2% in Q3 – with store sales decreasing 6% compared to Q3 FY22 and online sales falling 8% compared to last year. The retailer’s online sales represented only 38% of total net sales. Segment wise, Old Navy, which makes up more than half of the company’s revenue, saw comps grow 1%, whereas comps were down 1% at Gap. The namesake brand is almost getting close to turning positive since underperforming locations have been closed. However, Banana Republic (comps down 8%) and Athleta (-19%) 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 current levels now, vs. an increase of about 20% 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 67% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% 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 HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality 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 2023, down almost 5% y-o-y. We now forecast earnings per share to come in at $1.18. Given the changes to our revenues and EPS forecast, we have revised our Gap’s Valuation to $18 per share, based on a $1.18 expected EPS and a 15.3x P/E multiple for the fiscal year 2023 – only 4% lower than 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.
Gap reaffirmed its previous full-year revenue outlook, which calls for 2023 net sales to decline in the mid-single-digit percent range from $15.6 billion in FY’22. The company also expects fiscal 2023 capital expenditures of roughly $475 million, below its previous range of $500 million to $525 million, partly driven by fewer planned store openings. In FY’23, Gap plans to open a net total of 15 to 20 Old Navy and Athleta stores, while shuttering a net total of nearly 50 Gap and Banana Republic stores.
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.
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