If, like me, you were under the impression that The Gap (NYSE:GPS) was a dusty relic of a bygone era when malls ruled as the epicenter of teen angst (and apparel distribution). Its recent resurgence has served notice that is not the case. The company’s stock has soared a remarkable 165% over the past year, grabbing attention and resetting expectations. The company has benefited from an effective turnaround strategy that has delivered robust financial results, including five consecutive quarters of market-share gains and positive comparable sales across all brands.
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This has been further buoyed by a refreshed marketing effort that has heightened brand storytelling and celebrity endorsements. The company has demonstrated financial stability despite the recent challenging retail environment and is expected to yield more positive upside. Despite this recent success, the shares trade at a sizable discount to industry peers, making it a compelling value investment in the apparel retail industry.
The Gap’s New CEO Leads a Successful Turnaround
Gap is an iconic specialty apparel company with a portfolio of lifestyle brands, including Old Navy, Gap, Banana Republic, and Athleta. It operates through 3,571 company-owned stores and franchise locations in over 40 countries, and has a strong online presence globally, notably in Asia, Europe, Latin America, the Middle East, and Africa.
The company appointed Richard Dickson as President and CEO in August 2023. He previously served as the President and COO at Mattel (NASDAQ:MAT), playing a crucial role in its global transformation, which reinstated Mattel’s industry influence. Under his leadership, Gap has substantially improved inventory management, reducing its inventory by 15% compared to the previous year and increasing its merchandise margin by 340 basis points, resulting in a 400 basis point increase in overall gross margin to 41.2.
Gap’s Recent Financial Results and Outlook
The company recently reported first-quarter results for fiscal 2024. Revenue of $3.39 billion marked a 3% year-over-year increase and exceeded analysts’ estimates of $3.29 billion. Net sales were up 3% compared to last year’s quarter, driven by the rise in stores and online sales by 3% and 5%, respectively. Operating expenses were $1.2 billion, with a net income of $158 million and earnings per share (EPS) of $0.41, greatly exceeding consensus estimates of $0.14.
The company concluded the quarter with a significant 48% increase in cash, cash equivalents, and short-term investments, amounting to $1.7 billion. However, it marked a negative $63 million free cash flow, with net cash from operating activities accounting for $30 million. The board approved a second-quarter dividend of $0.15 per share, following the first-quarter dividend of the same amount.
Management has given guidance for the Fiscal year of 2024, projecting a slight increase in net sales compared to the previous year’s results of $14.9 billion. The gross margin is projected to expand by at least 150 bps, a significant increase from the prior outlook of 50 bps expansion. Operating expenses are expected to remain stable at around $5.1 billion, while operating income is anticipated to grow by roughly 45%, exceeding the previous growth forecast of the low-to-mid teens.
What Is the Price Target for GPS Stock?
Analysts following the company have mostly been bullish on the stock. For instance, TD Cowen analyst Jonna Kim recently upgraded the shares from a Hold to a Buy rating with a price target of $30. She noted the company is in the early stages of a transformation across all brands with an underappreciated growth potential.
Gap Inc. is rated a Moderate Buy based on the recommendations and price targets recently assigned by 15 analysts. The average price target for GPS stock is $26.65, representing a potential upside of 13.69% from current levels.
The stock sports a beta of 1.73 and has been volatile. After the strong earnings report, it jumped 38% in May, only to give back 19% since. The shares trade in the upper half of their 52-week price range of $8.66 – $30.75, at a price that makes them undervalued relative to industry peers. The company’s P/E ratio of 13.02x is significantly lower compared to the Apparel Retail industry average of 23.65x.
Bottom Line on the Gap
The Gap’s revitalizing comeback story has caught investors’ attention. The recent Q1 report showed promising business growth, and management revised guidance to further potential upside. With shares currently undervalued, GPS stock represents a compelling value investment in the apparel retail industry.
