Is Gap Stock Undervalued?

We believe that Gap Inc. stock (NYSE: GPS), a specialty retailer selling casual apparel, accessories, and personal care products for men, women, and children, is a good buying opportunity at the present time. GPS stock trades near $13 currently and it is, in fact, down 28% from its pre-Covid high of around $19 in Feb 2020 – before the coronavirus pandemic hit the world. GPS stock has had a volatile ride since early 2020 as the Covid-19 store closures were not kind to the company. Further, the company faced headwinds with supply chain issues weighing heavily on its performance in 2021, particularly driven by longer transit times from the West Coast port delays and the sudden and prolonged closure of factories in Vietnam. To avoid congested ports, Gap chose to ship a larger portion of its merchandise via air freight services. And, these more expensive shipping options also weighed on its profits in the second half of the year.

While the company’s stock rallied 113% from levels of around $6 in March 2020, when broader markets made the bottom, to levels of around $13 currently – GPS stock saw subdued performance compared to the overall market. However, the company’s stock seems attractive at the current price. GPS’ P/S multiple remained flat at 0.41x between fiscal 2018 and fiscal 2021. While the company’s P/S has now declined to 0.33x, there is an upside potential when the current P/S is compared to levels seen in the past years. The company’s management is diversifying port exposure through Eastern and Southern ports, growing its Mexico and Central America sourcing in 2022 to increase manufacturing speed, divesting smaller non-strategic brands, and shedding underperforming North American stores – to further strengthen its core business. Going forward, Gap expects its top line to grow by low single-digit percentages in 2022, while full-year earnings of $1.85 to $2.05 per share could be as much as triple what the company posted for fiscal 2021.

In 2021, Gap’s full-year revenue was up 21% year-over-year (y-o-y) and was nearly 2% above 2019’s levels. In addition, the company swung from a larger loss of $665 million in 2020 (or -$1.78 per share) to a profit of about $256 million in 2021 (or $0.68 per share). This was impressive given that the company saw a 5% higher operating expense and a 10% rise in the cost of goods sold and occupancy expenses in 2021. These full year’s results give hope that the company is bouncing back from the dim days of 2020, although it still continues to face challenges in terms of supply chain headwinds.

GPS has seen an impact that was slightly better than the S&P 500 index during the last economic downturn. During the 2007-09 recession, GPS stock fell from a peak value of $22 in December 2007 to $18 in September 2007 – a decline of 16% compared to a peak-to-trough decline of 57% for the S&P 500. However, the stock fully recovered to its pre-recession peak by September 2009. We focus on a comparative analysis of Gap’s stock upside post-Covid in an interactive dashboard analysis. On the contrary, GPS stock fell 66% from a high of $19 in February 2020 to $6 in March 2020, compared to a peak-to-trough decline of 34% for the S&P 500 – in the recent Covid recession. While the stock fully recovered to its pre-Covid peak by October 2020 and even saw a high of $36 in May 2021, it is currently on a declining trend due to grave supply chain problems. That said, the current dip in GPS stock could be used as a buying opportunity for better gains in the long run.