Stay Far Away From Gap Stock (GPS)

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Gap Inc. (GPS) stock tumbled to fresh three-year lows Wednesday after the president of its Old Navy brand left to lead Ralph Lauren (RL), but don’t even think about buying in.

GPS GapGap’s target younger demographic base wants nothing to do with the brand these days, and the proverbial knife has plenty of room to keep falling, meaning savvy investors would do well to avoid these low prices.

Ralph Lauren announced Wednesday it hired Stefan Larsson away from Gap’s Old Navy brand as its next CEO to replace Ralph Lauren himself. But the move, while boosting RL stock 13.6% on Wednesday, leaves a significant void at Gap. Old Navy, known for its more affordable active wear, has been one of the few bright spots on Gap Inc.’s balance sheet.

Gap stock plunged more than 5.7% to rock-bottom prices. GPS is now trading with a seemingly bargain 10.8 price-to-earnings ratio … but, again, this stock is no deal.

Gap Stock in Deep Trouble Without Larsson

Larsson took over at Old Navy three years ago to revive Old Navy to better compete with H&M and Forever 21, and that brand now feeds The Gap with $6.8 billion in revenue — more than any other revenue stream. Old Navy routinely provided sales growth where the Gap Inc. and its other brand Banana Republic, suffered declines. But Larsson’s departure means Old Navy’s momentum could stagnate.

In addition to losing the head of Old Navy, The Gap has suffered another critical loss recently — its Millennial customer base. Today’s younger generation, full of hipsters favoring individual, outside-of-the-box styles, mock Gap’s preppy apparel as a “uniform.” Gap’s clothes are simply shunned by this younger generation, so, without a substantial rebranding effort, Gap stock is doomed to continue its downward spiral.

Gap is even in danger of losing consumers who do have a taste for its simple, polished clothes. Why would consumers by The Gap’s clothes when they can get the same pieces at Target, Walmart or online at Amazon for cheaper prices? These more affordable retailers can easily continue to snatch Gap’s traditional customer base.

Street analysts agree that Gap stock isn’t worth buying now. GPS was downgraded from “neutral” to “sell” at UBS, which lowered its price target from $40 to $25 — a few dollars below the current pricing. Tesley Advisory dropped its price target to $34, with a “market perform” rating. Mizuho downgraded shares to “underperform,” with a $26 price target.

Gap and Banana Republic brands are trying to replicate Old Navy’s success, driven mainly by Larsson’s focus on adapting flexibility with Old Navy apparel with a model that tests consumers’ tastes and quickly adapt to new fashion trends. But analysts don’t expect those efforts keep the same momentum for Gap stock without Larsson.

GPS is expected to report its next quarterly earnings Nov. 19, with analysts anticipating 74 cents per share, up from 78 cents a year ago. August sales proved that revenue is on a downward projectory, with net sales declining 3% to $1.20 billion from $1.23 billion a year prior, a slump mainly due to the strengthening dollar weighing overseas sales.

Considering Gap’s outdated brand and slumping sales, GPS stock is a bad fit on pretty much every investor.

As of this writing, Rebecca McClay did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/gap-stock-stay-far-away-gap-inc-stock/.

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