Trendy retail outfitter Gap Inc. (GPS) has had a rough week, announcing that it will shutter 175 stores in the North American market, with a 140 of those locations closing before January.
In addition, approximately 250 jobs will be eliminated from its corporate offices. GPS’ executive management team provided the usual fluff-piece of needing to “drive productivity improvements” by jettisoning their weakest brick-and-mortar performers.
But will such measures be enough to save Gap stock from a collapse in the markets?
By closing what amounts to one quarter of its Gap-branded stores, GPS is tacitly admitting that the economy — as determined by middle-class consumer sentiment — is far weaker than anyone would care to admit.
In the first quarter of FY2015, Gap stock’s revenue declined by 10%, contributing to an 8% loss in net income. Further sales losses to the tune of 8% were reported by GPS-owned Banana Republic, another trendy clothing store. However, revenue for Old Navy — GPS’ low-cost brand — bucked the trend, increasing by 3%.
Clearly, consumers prefer actual value over perceived value, and that preference could pose serious challenges for Gap stock. GPS is presently navigating a dangerous technical tight rope. If Gap traverses the path successfully, risk-taking investors will no doubt be rewarded with excellent returns.
However, should things go awry for Gap stock — which seems more likely against a longer-term picture — the matter will quickly turn ugly.
Let’s consider Gap stock’s daily candlestick chart from a year-to-date basis. Since bottoming on June 9 with a session close of $37.52, GPS shares are slowly clawing its way back towards the $39 level. This price range represents roughly the midway point where GPS spectacularly gapped down to open the May 12 session.
Naturally, filling this gap is the first priority for investors, and GPS shares appear to be in the middle of forming a rounding bottom formation, which contextually would have bullish implications.
However, on a monthly chart, Gap stock has a far different prognostication. Two points are immediately evident. First, the ceiling of GPS’ price range from the middle of 2013 until the present time is eroding rather precipitously. Aligned with that bearish development is the fact that trading patterns over the past three months have been moving closer to the lower end of the aforementioned price range.
If Gap stock fails to overcome technical resistance between $39 and $40, the bears could potentially plunge GPS first to $35 — where weak support lies — before hammering it down to around $20.
Historically, though, this would not necessarily spell the end of Gap stock. GPS has been publicly traded for 335 months. In that time, 187 months — or 56% — were positive against its prior month. This suggests a high level of “recoverability” in Gap stock, and intrepid traders can potentially make huge profits off of a comeback rally.
But trying to catch a falling knife at current market levels would likely lead to deep lacerations. Look for Gap stock to correct sharply before engaging this opportunity.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
