Gap’s Stock Looks Expensive At $14

Note: Gap’s FY’21 ended on January 29, 2022.

After almost a 25% increase over the last six months, at the current price of around $14 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 – could see declines. GPS stock has increased from around $11 to $14 over the last six months, largely outperforming the broader indices, with the S&P falling about 4% over the
same period. The company saw better-than-expected Q3 results, which led to this stock rise. In Q3, Gap’s comparable sales rose 1%, surpassing a bearish Wall Street estimate set at -3.4%. Its total revenue increased 2% year-over-year (y-o-y) to $4 billion, beating expectations of $3.8 billion. Store rationalization efforts also seemed to pay off at Gap brand and Banana Republic stores, where comparable sales rose 4% and 10%, respectively. At Old Navy, which makes up roughly half of the company’s revenue, comps were down 1% and they were flat at Athleta.

That said, the Gap continues to have many headwinds, including the lack of a permanent CEO, stagnation of its brands, and ineffective cost-cutting as margins decline. The company has been without a permanent CEO since the summer of 2022. Bob Martin, the executive chairman, is serving as interim president and CEO. So far in FY’22, discretionary spending has remained difficult following the lockdown due to the drying-up of pent-up demand (as seen in FY’21). We believe that macroeconomic uncertainties will likely not bode well for discretionary spending in the near term.

The company expects Q3  trends to deteriorate in the holiday quarter, forecasting a revenue decline of mid-single-digits, which compares to consensus decline of just 0.6%. Gap did expect to get a boost on the cost side, calling for a 540 basis point lift in gross margin as it laps additional air freight charges from last year. However, inflation is expected to add 200 basis points to expenses. The Gap is conducting a process of reducing storefronts, as they seek to cut costs and reduce low-profit locations. The intention is to reduce locations by 29% between 2019 and 2023.

We forecast Gap’s Revenues to be $15.7 billion for the fiscal year 2022, down almost 6% y-o-y. We now forecast revenue per share (RPS)  to come in at $41.66. Given the changes to our revenues and RPS forecast, we have revised our Gap’s Valuation to $12 per share, based on a $41.66 expected RPS and a 0.3x P/S multiple for the fiscal year 2022 – almost 13% lower than the current market price. That said, the company’s stock appears expensive at the current price.

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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