Gap Inc. Stock Holds Steady After Recent Turnaround Efforts

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

After a 24% rise year-to-date (YTD), Gap Inc. stock (NYSE: GPS) currently trades at around $22 per share. As a specialty retailer known for casual apparel and accessories under brands like Gap, Old Navy, and Banana Republic, analysts believe the company’s stock is appropriately valued. This comes as a contrast to its peer Guess (NYSE: GES), which has seen its stock decline by 18% in the same timeframe. Gap has experienced a drop in sales, with revenues falling from $16.7 billion in 2021 to $14.9 billion in 2023 — an 11% decrease. Nonetheless, they aim to improve sales and earnings through cost-cutting measures initiated in the 2022-2023 period, along with changes in leadership, notably with CEO Richard Dickson at the helm.

Signs of improvement are starting to surface, with positive comparable sales appearing in FY 2024. The company closed 344 underperforming Gap and Banana Republic stores, which is expected to contribute to long-term sales growth by aligning with their strategic direction. Notably, Gap’s revenue rose by 3% year-over-year (y-o-y) to $11 billion in the first nine months of FY 2024, while gross profits rose significantly, showing earnings at $1.70 per share compared to 86 cents per share from the first three quarters of last year.

However, the performance of GPS stock has been inconsistent over the past three years, with annual returns exhibiting greater volatility than the S&P 500. The returns included -11% in 2021, -33% in 2022, and a substantial 97% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, provided a much steadier performance and has consistently outperformed the S&P 500 during the same period.

What accounts for this disparity? The HQ Portfolio has shown better returns with reduced risk compared to the benchmark, making it a more reliable choice amidst market fluctuations. Given the current economic uncertainties surrounding interest rates and ongoing global tensions, it raises the question: does GPS risk facing challenges similar to 2021 and 2022, or is a robust recovery on the horizon?

The success of the apparel industry largely depends on consumer spending and confidence. Although there has been some recovery from the pandemic’s impact, consumer confidence still trails pre-COVID levels. The recent U.S. consumer confidence index rose to 108.7 in October from 99.2 in September, reflecting growing consumer optimism. To highlight the difference, the index was at 132.6 in February 2020, just before the pandemic began.

During the third quarter, Gap reported a 1% increase in comparable sales. Diving deeper, Old Navy, which constitutes over half of the company’s revenue, saw its comparable sales remain flat compared to last year’s 1% rise. The Gap brand highlighted a 3% increase in comparable sales, while Athleta’s sales grew 5% in Q3, a notable rebound from the previous year’s -19%. Banana Republic’s comparable sales dipped by 1%, though this performance was better than last year’s decline of 8%. This indicates that Gap continues to rely heavily on its core brands for revenue generation.

As of November 2, Gap’s cash and cash equivalents jumped by 46% year-over-year to $2 billion, with free cash flow sitting at $540 million, consistent with the prior year. The retailer has also reported a substantial increase in gross margin by 350 basis points to 42.2% during the first nine months of FY 2024. This improvement is mainly attributed to a shift towards reduced promotional activities and effective management of inventory, which saw a 2% decline y-o-y in Q3 2024. Overall, Gap exhibits steady progress in cash flow and margins, particularly at its Old Navy and Gap brands.

Looking ahead, we anticipate Gap’s Revenues will reach $15.1 billion for FY 2024, reflecting a 1.5% increase y-o-y. We now project earnings per share to be around $2.10. Following adjustments to our forecasts, we have updated Gap’s valuation to $22 per share, based on the expected $2.10 EPS and a 10.6x P/E multiple for FY 2024, which aligns closely with the current market price.

For FY 2024, Gap plans for sales growth of 1.5% to 2% compared to previous forecasts of slight revenue growth from $14.9 billion in FY’23. They are targeting a mid-to-high 60% growth range in operating income and anticipate a gross margin expansion of at least 220 basis points, aiming for approximately 41%. The company expects solid performance from both Old Navy and Gap brands in FY’24.

To better understand competition, it can be insightful to explore how Gap’s Peers perform on significant metrics. Detailed comparisons can be made with other companies across various industries at Peer Comparisons.

As investors hope for a smooth transition for the U.S. economy, they may wonder what could happen if a recession occurs. For a historical perspective, our dashboard titled How Low Can Stocks Go During A Market Crash provides insights on how key stocks responded during and after the last six market crashes.

[1] Returns as of 11/22/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios

See all Trefis Price Estimates

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.