Don't dismiss the good old GAP

📈 Trade Details

Straight-out stock purchase at $20.41 (price at the time of writing)

🗒️ Quick Summary

Ticker: GAP

About the Company: GAP Inc. is a global apparel retailer that operates several well-known brands, including Gap, Old Navy, Banana Republic, and Athleta. The company designs, markets, and sells various clothing, accessories, and personal care products for men, women, and children.

$GAP focuses on providing fashionable and affordable clothing with a strong emphasis on casual wear. The company operates through physical retail locations and e-commerce platforms, aiming to enhance customer experience through a digital-first approach.

Current Price (at the time of writing): USD 20.41

🎯 What do we expect?

If the expected Earnings growth materializes, the expected return is 53.73% in 2027 or 19.86% annualized.

🎯 What analysts think (Price in One Year):

Avg. Price: $27.85 (+32% Gain)
Highest Price: $35 (+58% Gain)
Lowest Price: $14 (-18% Loss)

🎯 What do financial models think:

Avg. Price: $22.80 (+12%)

Dividends: Multi-Stage $27.39 (34.2%)
Dividends: Stable Growth $31.74 (55.51%)
Earnings Power Value $19.85 (-2.74%)
10Y DCF Growth Exit $19.27 (-5.59%)
5Y DCF EBITDA Exit $26.87 (31.65%)
10Y DCF EBITDA Exit $27.56 (35.04%)
EBIT Multiples $18.15 (-11.07%)
PB Multiples $17.24 (-15.53%)
PS Multiples $18.63 (-8.73%)
P/E Multiples $20.74 (1.62%)
5Y DCF Revenue Exit $21.94 (7.49%)
EBITDA Multiples $26.77 (31.16%)
5Y DCF Growth Exit $20.85 (2.16%)
10Y DCF Revenue Exit $22.20 (8.77%)

🕰️ Historical Performance vs. S&P500

The stock has underperformed S&P over the last five years despite having the same EPS growth.

🔮 Future Earnings Expectations

Future earnings expectations are impressive. Almost 30% EPS growth in 2025 (16 Analyst Consensus), 10.22% in 2026 and 13% in 2027.

🐂 Key Bullish Arguments

Growth Momentum: Gap is expected to sustain growth, returning to low-single-digit growth by FY25, driven by brand performance and management execution.

Strong Brand Performance: Old Navy and Gap Brand have shown consistent sales growth, with Old Navy benefiting from consumer preference for value.

Management Execution: New management has shown a strong track record, leading to share gains and improved execution across brands.

Conservative Guidance: Management’s cautious guidance suggests potential upside surprises in revenue performance.

Valuation Upside: With growth and margins normalizing, there's potential for valuation multiples to increase.

From the latest Earnings Call:

Positives:

1. Financial Performance:

   • Net sales increased by 5% to $3.7 billion.

   • Comparable sales rose by 3%, with Old Navy posting a 5% increase in comps.

   • Expanded gross margin by 500 basis points, leading to an operating margin of 7.9%, up 490 basis points year-over-year.

   • Earnings per share (EPS) increased to $0.54, up from $0.32 in Q2 2023.

2. Market Share Gains:

   • Achieved market share gains for the sixth consecutive quarter, indicating strong customer response to brand strategies.

   • Old Navy and Gap brands both reported positive comps, demonstrating effective brand reinvigoration efforts.

3. Inventory Management:

   • Maintained inventory discipline with levels down 5% year-over-year.

   • Strong cash position of $2.1 billion and generated nearly $400 million in free cash flow year-to-date.

4. Brand Reinvention:

   • Successful marketing campaigns (e.g., Linen Moves and Get Loose) are resonating with consumers.

   • Positive trends in key categories such as women's apparel and denim.

5. Strategic Initiatives:

   • Focus on operational rigor and cultural accountability is becoming ingrained in the company's practices.

   • New media partnerships and technology initiatives are expected to enhance marketing effectiveness.

🐻 Key Bearish Arguments

Mixed Brand Performance:

• Banana Republic's comps were flat, indicating ongoing challenges in re-establishing the brand.

• Athleta's comps were down 4%, although management expects a return to positive comps in the latter half of the year.

Macroenvironment Deterioration: A worsening economy could impact comparable sales growth (CSG) if consumer spending declines.

Job Market Uncertainty: Recent U.S. job data suggests potential challenges, which could affect Gap’s performance.

Political Factors: A potential Trump election win might lead to increased tariffs, raising inflation and reducing consumer spending.

Inflation Risks: Higher inflation could reduce consumer purchasing power, impacting sales.

🆚 How does it compare to other companies?

Here is a summary of key profitability ratios for $GAP and its main competitors: $ANF (Abercrombie & Fitch), $URBN (Urban Outfitters), and $AEO (American Eagle Outfitters).

Profitability Ratios Table

Analysis of Ratios

1. Gross Profit Margin: $ANF leads with a significantly higher gross profit margin, indicating better control over production costs relative to sales. $GAP's gross margin is lower, suggesting higher costs or pricing pressures.

2. Operating Profit Margin: $ANF again shows the strongest operating profit margin, indicating efficient management of operating expenses. $GAP's operating margin is notably low, reflecting challenges in managing costs.

3. Net Profit Margin: $ANF has the highest net profit margin, suggesting effective management of all expenses, including taxes and interest. $GAP's net profit margin is the lowest, indicating potential issues with profitability.

4. Return on Assets (ROA): $ANF demonstrates superior asset utilization compared to $GAP, which indicates that $GAP may not be using its assets as effectively to generate profit.

5. Return on Equity (ROE): $GAP has a high ROE, which suggests that it is returning a good amount of profit relative to shareholders' equity, but this could also be influenced by high leverage.

6. Return on Capital Employed (ROCE): $AEO and $ANF show strong returns on capital employed, indicating efficient use of capital to generate profits.

Conclusion

GAP is a wonderful old boring business that is making a comeback with the new management that seems to be doing the right things with branding & pricing, delivering impressive EPS growth.

Disclaimer

I currently do not have an active position in any of the companies mentioned above but am thinking of initializing in the next few days. As usual, the information provided in this newsletter is for general informational purposes only. All information in the newsletter is provided in good faith, however, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. The content of this newsletter does not constitute financial advice, investment advice, or any other type of advice and should not be relied upon for any individual circumstances. We are not financial advisors, and you should consult with a professional before making any investment decisions. Any action you take upon the information in this newsletter is strictly at your own risk, and we will not be liable for any losses and/or damages in connection with the use of our newsletter.

Happy Investing,
Andy