Is Gap Stock a buy for under $15

Clothing company Gap (GPS) recently witnessed a rally. But with continued macroeconomic uncertainty surrounding interest rate hikes, let’s examine whether the stock has what it takes to deliver sustainable returns… – StockNews

The Gap, Inc. (GPS) is a specialist clothing company that offers clothing, accessories and personal care products for women, men and children. The global and omnichannel retailer markets its offerings under the Old Navy, Gap, Banana Republic and Athleta brands.

Despite losing 17.7% year-to-date to close the last trading session at $15.15, the stock is currently trading above its 200-day moving average of $11.30, indicating potential downside risk.

But with the odds of the Fed eventually raising benchmark interest rates significantly above expectations increasing with each release of economic data, an end to today’s economic uncertainty does not appear to be in sight.

So let’s examine closely whether the basics make GPS worthy of investment.

Weak economy

For the fiscal 2022 third quarter ended Oct. 29, GPS’s non-GAAP gross profit fell 5.4% year-over-year to $1.56 billion. The company’s gross margin for the period was 38.7%, lower than 41.9% in the previous quarter. Operating income also fell 8.2% year over year to $156 million.

GPS’s total assets were $12 billion as of October 29, 2022, compared to $12.78 billion as of October 30, 2021.

Gloomy analyst estimates

Analysts expect GPS revenue for the fiscal year ending January 2023 to decline 5.6% year-over-year to $15.73 billion. The company is expected to report a loss of $0.13 per share for the same period, compared to EPS of $1.44 in the previous fiscal year.

Inefficient asset utilization by management

GPS’ subsequent 12 months return on common equity at 2.05%, 84.1% is lower than the industry average of 12.92%. The company’s trailing 12-month net income margin of 0.35% is notably lower than the industry average of 5.05%, while its trailing 12-month return on total assets of 0.46% is 89.5% lower than the industry average of 4.36% .

Unenviable track record

Over the past three years, GPS revenue has shrunk to 0.9% CAGR, while EBITDA has declined to 33.3% CAGR. The company’s net income also declined at a CAGR of 59.2% during the same period.

POWR ratings reflect fundamental weakness

GPS’ overall D rating translates into a sale this spring POWR Ratings system. POWR Ratings evaluates stocks based on 118 different factors, each with its own weighting.

Our proprietary rating system also evaluates each stock based on eight different categories. GPS has a grade D for stability due to frequent changes at the helm. After parting ways with Art Peck in late 2019 and Sonia Syngal in July this year, the company has yet to name a new permanent CEO.

In addition, GPS has a D grade for growth, in sync with its weak historical growth rates and gloomy analyst estimates.

Not surprisingly, GPS is ranked No. 59 out of 66 stocks in Fashion and luxury industry.

click here to see additional POWR ratings for value, momentum, sentiment and quality for GPS.

The bottom line

Given that the Fed may go further than expected with its rate hikes, rising borrowing costs and reducing discretionary spending could put further pressure on the company’s already compressed margins. The short-term outlook does not look encouraging for GPS.

In addition, the company has an additional threat from fast fashion, which can further affect profitability.

Given GPS’s weak financials, low profitability and underwhelming growth prospects, it may be wise to avoid this clothing stock for the time being.

How The Gap, Inc. (GPS) Works Stack up against their peers?

GPS has been rated D, equivalent to strong sales. You can check out these other stocks in the fashion and luxury industry with an A (Strong Buy) or B (Buy): J. Jill, Inc. (JILL), Hugo Boss AG (BOSSY), and Chico’s FAS, Inc. (CHS).

GPS shares were trading at $14.40 per share on Tuesday afternoon, down $0.75 (-4.95%). So far this year, GPS has fallen -14.01%, against an increase of -16.51% in the benchmark S&P 500 over the same period.

About the Author: Santanu Roy

After becoming fascinated by the traditional and evolving factors that influence investment decisions, Santanu decided to pursue a career as an investment analyst. Before switching to investment analysis, he was a process associate at Cognizant. With a master’s degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.


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