One of the great stories of the 1990’s was Gap Inc. (NYSE:GPS), and GPS stock still has its own good story. The clothing retailer found the sweet spot of the retail clothing market. Its clothes were meat-and-potatoes, but of high quality and fit with the kind of minimalist style of the day.
Gap Inc. management understood its customer, and broadened into slightly higher end fashion with Banana Republic.
I still think that Old Navy undercut and cannibalized its existing business, but the truth is that became a major discount brand.
GPS stock is an oddball in the clothing retail business. If you look at the majority of other brands, they tend to burn bright and hot, have soaring stock prices, quickly go out of favor, and the stocks crash.
However, Gap has had an intriguing resiliency. GPS stock hit a spike top of $48 in December of 1999, right at the end of the dot-com bubble.
GPS stock crashed to $13 over the next 21 months and bobbled around in a trading range that rarely broke $20 until 2011. Then GPS stock had a renaissance and soared into the $40s again, before backing down to $20, and now rests at $30.
GPS stock may not be going anywhere fast, but that’s not a bad thing necessarily. It has settled into Peter Lynch stalwart territory – delivering 6-9% annual returns for investors.
The reason GPS stock can do this is because management has been consistent and persistent in maintaining its vision amidst a clothing retailing landscape that seems to shift like the wind.
The GPS stock 10-K explains this very succinctly:
“Gap is one of the world’s most iconic apparel and accessories brands anchored in optimistic, casual, American style. Founded in San Francisco in 1969, the brand’s collections continue to build the foundation of modern wardrobes – all things denim, tees, button-downs, and khakis, along with must-have trends. Gap is designed to build the foundation of modern wardrobes through every stage of life with apparel and accessories for adult men and women under the Gap name.”
The key with Gap is that its clothing is rooted in foundational modern wardrobe, the stuff everybody owns in some way, that people can then accessorize. Gap has slowly and prudently expanded this concept beyond just men and women’s clothing into clothes for all stages of life.
Over the years, Gap slowly acquired or opened other chains. Banana Republic “deliver[s] versatile, contemporary classics, designed for today with style that endures. Banana Republic offers clothing and accessories with detailed craftsmanship and luxurious materials.” i.e. more upscale.
On the other end, as mentioned, there is the discount brand of Old Navy.
Ten years ago, Gap made a move into styles for women and girls by purchasing Athleta, which “integrates technical features and innovative design across its women’s collection to carry her through a life in motion, from yoga, training and sports, to everyday activities and travel.”
So, again, Gap sticks with the idea of selling basics, but for a wide variety of activities.
Gap revenues have declined from $16.43 billion in FY14 to $14.4 billion in the TTM. However, TTM net income is $928 million which is about the same as it was in 2015.
So Gap is finding efficiencies and expense cuts, while returning $0.92 per share, or about $375 million, in dividends per year to shareholders. There’s also share buybacks. I generally don’t care for these, but Gap seems to be using its capital prudently here.
GPS stock isn’t a blockbuster but it may be a nice conservative addition to a long term diversified portfolio.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
