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

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.

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.

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.

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