Gap Stock Fills Its Gap Down, Finishes Positive

Mall-facing retailers like The Gap (GPS) have had a tough time with things lately. That much is clear just looking at Gap’s latest earnings report. Yet, despite the company’s massive premarket loss of 17.8% on Friday, it recovered significantly, finishing over 4% higher.

Despite some recovery in the sector and the return of shoppers to physical storefronts after the pandemic’s biggest days, I’m bearish on nearly all mall-facing retailers. Gap, however, is an exception. While things certainly didn’t look good this quarter, Gap has a secret weapon in its sheer diversification.

The last 12 months for Gap stock are mostly downhill. An attempt to plateau around $23 per share in early November was thwarted, and the company’s ongoing decline to around $10 a share continued unabated.

The latest news held very little help for the company as a whole. Gap reported a net loss of $0.44 per share, which was a huge disappointment against last year’s figure of income of $0.43 per share.

Revenue, however, proved the lone bright spot, as the company brought in $3.48 billion, which beat expectations calling for $3.46 billion. Same-store sales also declined 14% in the quarter.

Wall Street’s Take

Turning to Wall Street, Gap has a Hold consensus rating. That’s based on three Buys, eight Holds, and six Sells assigned in the past three months. The average Gap price target of $12.10 implies 4.3% upside potential.

Analyst price targets range from a low of $7 per share to a high of $22 per share.

Investor Sentiment is on Gap’s Side

Gap currently holds a Smart Score of 4 out of 10 on TipRanks, putting it at the lowest level of “neutral.” In other words, it has slightly better odds of underperforming than outperforming the broader market, but it could ultimately go either way.

Based on investor sentiment indicators, meanwhile, it’s starting to look like a swing toward “outperform” may be forthcoming.

One of the best indicators on the side of Gap’s success is hedge fund involvement. The TipRanks 13-F Tracker shows that not only is hedge fund involvement with Gap on the rise, but it’s the highest it’s been in years.

Hedge funds went from owning a little over 28.78 million shares in December 2021 to owning just over 43.285 million in March 2022. The previous high was back in September 2020, when hedge funds owned around 36.24 million shares.

Hedge funds aren’t the only ones buying, either; insider trading at Gap is heavily buy-weighted, particularly in recent trading. While no transactions were recorded in March, the last three months of trading featured 24 buy transactions and just five sell transactions.

Going back over the last 12 months, there were 43 buy transactions to 24 sell transactions. There was more selling interest when the share price was higher, but it’s clear that insiders are getting back into The Gap.

As for retail investors who hold portfolios on TipRanks, the picture is a bit rockier but gaining for The Gap. In the last seven days, TipRanks portfolios that held Gap stock were up 0.7%, while in the last 30 days, that number was down 0.2%.

The Gap’s dividend history, meanwhile, is a bit rocky but starting to look like proper income investment terrain again. Like many companies, Gap halted its dividend back in January 2020 and wouldn’t restart until April 2021. The amount dropped going into July 2021 but began to rise again with April 2022’s arrival.

Is Diversification Enough to Save Gap?

I have a serious problem with all mall-facing retailers. That is – the “mall” part. Malls have been in decline since well before the pandemic started. Multiple starry-eyed articles about the future of malls have been released in that space, and few of them ever seem to take hold.

Such articles describe breathlessly how the old Chess King can become office space or an upscale restaurant. Fountain squares become carnivals with little Ferris wheels, and two-story anchor department stores end up as family entertainment spots with rock climbing and miniature golf.

In the end, though, all it ever seems to become is fodder for dead mall videos on YouTube.

However, there’s one advantage for Gap that many mall-facing outlets don’t have: diversification. Gap isn’t just Gap, after all. Gap is also Old Navy, Banana Republic, and Athleta. While Old Navy same-store sales were down 22% against this time last year, and Athleta was down 7%, Banana Republic was up 27% against this time last year.

Old Navy’s slowdown was partially traced to a move to offer more plus-sized apparel. While that wasn’t a bad idea in and of itself, it did result in an inventory imbalance. The company sold too little of the plus-sized apparel. Too much of the “core-size” apparel had demand that went unmet.

Old Navy plans to adjust its course in light of these revelations, getting back to what its CFO Katrina O’Connell called “value messaging.”

That “value messaging” will be critical going into a possible recession and an absolutely inflation-fueled environment. Consumers stung by high gas prices will cut costs elsewhere, like on clothes. Pulling down those prices may be enough to keep shoppers shopping.

Concluding Views

You have to give Gap credit for its range of options. It can cover stay-at-home apparel and go all the way to semi-upscale. That’s going to help protect it against a downturn, regardless of the mall’s ultimate outcome.

I’m not happy about any mall-facing outlet. However, Gap is much more than a mall-facing outlet. It’s got plenty of stand-alone and online operations to work with that should help in the coming months. Once it can fix its inventory issues and focus on being a value provider, it can likely bridge the gap even amid a down economy.

Gap turned it around from a disaster to a mild disappointment today. I’m reasonably convinced it can do so in the near-term future as well. That leaves me bullish on the Gap.

Read full Disclosure