Gap, Up 32% YTD, Still Cheap vs. Competition
The financial charts on Gap (GPS) show a company executing one of the more beautiful turnarounds in fashion retailing; one that despite odds brought back customers and rebuilt profit margins. Gap’s long-suffering shareholders are now up some 58% in the past year alone, as seen in a stock chart, and the share price hovers in 13-year high territory. Long-term investors might want to take a look at these still-modestly-priced shares before Gap’s doubters disappear completely.
That rise follows several years of sales declines caused by some bad fashion bets at a time when consumer spending was already off. Sales fell off and profit margins narrowed as the company discounted to move clothes out of its Gap, Banana Republic and Old Navy stores. In 2010, Gap launched several strategic plans that led to store closings in North America, a revamp of inventory management, a keener push for online sales, and new stores overseas, as well as rekindling its fashion mojo both online and off.
The financial data show the results.
Still, some skeptics have worried that the improvements from last year were more indicative of one-off bounces off bad histories rather than a sustainable trend. Those revenue and profit margin improvements, for example, were at least partly due to a big hit on the fashion front last spring. Gap introduced women’s crops in distinctive colors like fuscia and yellow lemon – a far cry from its famous basic denims – that required no discounting. But can it continually pick winners?
More investors have grown convinced that it can. Several analysts, including those at Citigroup (C) and Wells Fargo (WFC), put buy recommendations on Gap shares in recent weeks, although overall, sentiment for the shares remains mixed. Gap’s recent sales figures, however, may change more of those hold ratings to buys. Same-store sales were up 7% in May compared to a comparable period in 2012. The company is opening stores overseas now – 20 Old Navy’s in Japan alone in 2013, for example.
Gap shares still trade at valuations lower than its major competitors, like Abercrombie & Fitch (ANF) and Ross Stores (ROST). The chart below shows Gap’s forward PE ratio (15) below those companies and other major fashion retailers. Gap’s 1.6% dividend yield beats all of these except for American Eagle’s (AEO), which is skewed by a large one-time payout last September.
Fashion buyers can be fickle, and shoppers have a ton of alternative to Gap brands. Competition from the stores above as well as others, like H&M and Forever 21, is a constant worry. But right now, Gap is doing at least as well as those peers, but its share price isn’t. It’s the kind of gap value investors might want to exploit.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org. You can also request a demonstration of YCharts Platinum.