Gap Inc (NYSE:GPS) came off a strong quarter and fiscal 2017 as earnings and revenues came in higher than expected. While the equity rallied following the announcement, Gap stock has struggled to gain any traction since December.

Profit growth has seen substantial increases over the last few quarters. However, after this year, analysts expect profits to slow and possibly reverse in later years. With growth slowing and valuations reaching an average level, there will be fewer catalysts to drive Gap stock higher.

GPS Continues Growing and Appealing to Different Demographics

To be sure, Gap retains many strengths. It has about 3,600 stores in 46 different countries.

In addition to its Gap stores, the company also owns Banana Republic, Old Navy, Athleta and Intermix. These brands allow it to target different customers. Gap attempts to appeal to a broad amount of shoppers. However, Banana Republic attracts more cosmopolitan customers, while Old Navy markets to a more value-oriented set of consumers.

Appealing to diverse markets somewhat insulates GPS from the fickle customer bases and changing tastes that affect many of its peers. The company also has a solid balance sheet with ample cash and manageable debt levels.

Moreover, the company maintains a long-term record of positive earnings and strong free cash flow. Gap remains a solid company that will compete well in the retail clothing market for the foreseeable future.

The continued growth reflects its attributes. GPS reported better-than-expected fourth quarter and fiscal 2017 earnings in its last report. Comparable sales also rose by 5.2%. This marks the fifth consecutive quarter of higher comparable sales growth.

This helped take 2017 income to $2.13 per share, up from $2.01 per share in 2016. The company delivered guidance of $2.55-2.70 per share for 2018.

Expect Slower Earnings Growth

However, most believe growth will slow after this year. Analysts do not predict any significant upticks in earnings from there. Consensus estimates stand at $2.77 per share in earnings for 2019 and a drop to $2.45 per share for 2020.

Also, whether Gap will find that growth abroad remains unclear. Overseas stores have faced setbacks. Gap pulled out of markets in Poland, Israel and Australia over the last few years. It also closed all Old Navy stores in Japan.

However, the company has shifted its focus to the world’s most populated country, China, where it operates 140 Gap stores. It also opened a flagship store in Shanghai last year. Still, successes in China may take time.

Back in December, our own Luke Lango said that he didn’t see Gap stock heading much higher in the next 12 months. Three months later, that prediction continues to hold up well. The stock has fallen by 7% in that time frame.

I also agree with my colleague’s assertion that Gap trades at a fair valuation. The five-year average price-to-earnings (PE) ratio stands at 13.83. The current PE is around 14.7.

The dividend yield hovers in the 2.9% range. While that dividend stands well above the S&P 500 average, dividend levels have become unpredictable. Since 2008, the company has increased the dividend six times and cut it twice.

This compares poorly to dividend aristocrats such as Target Corporation (NYSE:TGT) who have increased their dividend annually for decades. Like Target, retail stocks such as Macy’s Inc (NYSE:M), Nordstrom, Inc. (NYSE:JWN) and Abercrombie & Fitch Co. (NYSE:ANF) also pay higher dividend yields than Gap stock.

Bottom Line on Gap Stock

Although GPS stock remains solid, it offers prospective investors little in the way of profit growth. With its diverse portfolio of stores and consistent profits, Gap remains a solid company that remains well-positioned to compete and face challenges. Unfortunately for investors, the company’s valuation remains near long-term averages.

Its dividend yield stands at above-average levels. However, dividend payment levels have fluctuated, and many peers offer greater stability and higher dividend yields. Given valuation and slowing growth, investors will likely see higher returns investing in a different retailer or even in the general market itself.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.