Is Gap Stock A Buy?

Gap Inc (NYSE:GPS) is an iconic American clothing and accessory brand founded in 1969. Its high-energy video advertising campaigns are prolific on streaming services. But Gap brands aren’t at the top of the fashion industry like they once were which has investors musing, is Gap stock a buy?

Unlike many fashion retailers, Gap excels in e-commerce. When other retailers struggled as mall restrictions were enacted, Gap could depend on its online sales to support top line sales.

Gap online sales percentage was 49%, up from 46% in the previous period. That’s an astonishing figure for a company best known for its brick-and-mortar mall presence than its digital footprint.

The company is famous for roping in famous talent in its ad campaigns to keep its brand image breezy and cool. For example, Gap’s recent collaboration with Kayne West’s Yeezy brand (dubbed the “Perfect Hoodie”) created a big online buzz and helped slow Gap share price declines over the summer months.

A still relevant brand combined with higher digital sales translates to an optimistic forecast for Gap, at least at first glance. 

Gap 101

Gap is a San Francisco, California-based retailer that operates a variety of store and clothing brands. On top of its eponymous brand, it also owns Banana Republic, Old Navy, and Athleta, among others.

Co-founders Donald and Doris Fisher were active in the business (Donald sat on the board until is 2009 death). The Fisher family remain as significant shareholders in the stock. The Fisher family control 43% of the shares according to recent reports.

Although the company has had its controversies over the years (including various labor issues, such as operating sweatshops), the company is overall known as one of the most ethical retailers.

Gap spotted the migration to digital sales early. Indeed, the number of open stores has largely been declining over the past decade, except for Old Navy North America, which continues to expand.

How Many Brands Does Gap Inc Own?

Gap currently owns six brands in the clothing and accessory space. That includes Gap, Old Navy, Banana Republic, Athleta, Intermix, and Janie and Jack.

While Old Navy covers the lower-priced clothing market, Banana Republic and Intermix are more upscale, and the rest fit into that wide spectrum. Athleta is the company’s sports apparel brand for women and girls. Janie and Jack focuses on babies and children clothing.

The company previous launched a Hill City brand focused on men’s sports apparel, but it soon found the market too competitive to make a profit and shuttered it. While the Gap family of brands isn’t at its 20^th century peak, it’s still a formidable retail company with a talented management team at the helm.

So, does that mean you should invest?

Is Gap Stock A Buy?

The pandemic crushed mall traffic, but created a tailwind for the company’s casual wear as people increasingly shopped at Gap online and worked from home. On the flip side, the company’s business-focused attire brand, Banana Republic, took a 30 percent dip during the second half of 2020.

And it’s unclear if that trend has subsided yet by this year’s holiday season. It will be a while yet before we have a clear picture of just how well Gap brands have individually performed the choppy retail trends.

Still, there’s plenty of good news – the company’s $4.2 billion in net sales for the second quarter of 2021 was its highest in over a decade. It represents an increase of 29 percent over comparable sales in the prior year and a 12-percent increase over 2019.

However, many analysts believe Gap is fairly valued now while we await signs of its future prosperity. Analysts have a range of estimated target share prices for Gap, from $28 to as high as $44. A simple discounted cash flow forecast analysis places the intrinsic price per share at $32.45, representing significant upside at this time.

Gap Financial Forecast

Gap’s forecasts show net sales growth of 30 percent for the fiscal year, while analysts are more bearish with a projection of 24.3 percent. Sales growth is offset by investments in air freight to help relieve inventory control and supply chain issues that are prevalent across so many industries currently.

Many suppliers Gap sources clothing from are in foreign countries that have ongoing restrictions, leading to shortages that could stifle growth opportunities in the short to medium term.

It headed into the back half of the year with $2.7 billion in cash and $523 million in net cash flow. Its 3,494 stores are expecting some shifts, as the company closes 75 North American Gap and Banana Republic stores while opening nearly the same number of Old Navy and Athleta locations.

Full-year diluted earnings per share guidance of around $2.00 would help justify another 20-30 percent in growth through year end. But there are still some major hurdles in the path of Gap and other clothing retail operators.

Watch The Gap: What Could Go Wrong?

A perpetual stumbling block on the horizon for Gap is the risk of its clothing brands falling out of favor with consumers. Although sales of its affordable clothing brands rose over the past year, that trend may be sustained as a migration back to office culture takes hold. By 2023, the Gap and Banana Republic brands are expected to shrink from 43 percent of sales at the end of 2020 to 30 percent.

Gap’s operating margin is on the rise, in part due to renegotiated rents, but it’s only a matter of time before those costs start to rise again and cut into profits. Still, with a healthy annual dividend yield of 2.15 percent, the company is keeping longer term, income-oriented investors satisfied.

Is Gap Stock A Buy? The Bottom Line

Gap is a long-standing American clothing brand that continues to deliver profits, despite sales hiccups for one of its top brands, Banana Republic. It outperformed much of its market over the past two years and has a solid online growth strategy that should sustain top line growth for the foreseeable future.

However, much of this growth relies on brands outside of its namesake. The actual Gap brand itself is losing some steam. If the company can breathe fresh air into its own brand though partnerships with relevant stars as it has attempted while growing its e-commerce presence, it could realize its fair market value, which is currently pegged at $32 per share.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.