Gap Seeks Reinvention Amid Its Retreat

How forgiving has 2020 been for stocks? Gap (NYSE:GPS) stock is trading 22% higher than where it closed 2019. That’s nearly $22 per share and a market cap of $8.2 billion for a company that expects 16% less revenue than a year ago.

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Could 2021 be better? It seems unlikely. The company said it will close about 30% of its stores over the next three years, with 75% of those closures taking place next year.

That news sent the shares up 11%.

The strategy makes sense. Gap and its Banana Republic stores are failing, so the company is closing 350 stores. It is abandoning malls in favor of e-commerce and strip mall locations. That’s where its Old Navy outlets and Athleta stores, which compete with Lululemon Athletica (NASDAQ:LULU) are located.

Still, it’s not a growth strategy and the shares are up?

Betting on Syngal

Investors haven’t completely lost their minds. (Well, maybe a little.)

Mainly they’re placing a bet on Sonia Syngal, who became the company’s CEO just as the pandemic hit in March. Syngal joined the company in 2004 and is given credit for reviving Old Navy.

Syngal has already had some impact. Gap store sales were up, year over year, for the quarter ending in July. But that was by a gain of just 10%, and overall revenue was down 20% from the previous year. She says each store must “stand for something.” Athleta focuses on athleisure, Old Navy on affordability. Within three years those two stores will represent 70% of company sales.

While Banana Republic will focus on casual comfort, Gap will go back to being the company’s fashion statement. Syngal is pushing her team to make fast, firm decisions, like a partnership with singer Kanye West. Some ideas will work, others won’t, but if the company is not dependent on the stores it can make those calls with less risk.

A Potential Bargain?

At the stock’s current price, you’re paying a little more than 50 cents on every dollar of sales for GPS stock. The company expects to report 29 cents per share of income on Nov. 24, with $3.8 billion of sales. There’s a “whisper number” of 40 cents. If it can hit those numbers, and sustain them over four quarters, the stock could be headed much higher.

That’s how some analysts are betting. Tipranks calls GPS stock a moderate buy, with 11 analysts in the wishy-washy hold category and only four saying buy it. The average price target is $21.67, just below where it’s currently trading, although one optimist holds hope for $28.

It can’t all be Afterpay. The fintech, which offers four-month payment plans at e-commerce checkout, will now perform that service for Gap customers.  It could boost Christmas sales, but most people already have credit cards.

Still, Afterpay represents an effort to innovate, to get the company out of its comfort zone. Investors like that. Gap has figured out the first step in getting out of trouble, which is to stop digging.

The Bottom Line For GPS Stock

A growing number of analysts are pounding the table for Gap.

The strategy shift sent the stock rocketing upward with long-term investors told to get on board. 

I’m not so certain. A price-sales ratio of about 50 is what you should pay for a successful retailer. Retailing stocks in general are overbought right now, with Walmart (NYSE:WMT) selling at 80% of revenue and Target (NYSE:TGT) near 100%. GPS stock is cheap relative to these stocks, but that doesn’t make it a growth story.

You can speculate on Syngal, whom I like. You can be on Gap hitting that Nov. 24 earnings whisper. Or you can invest elsewhere.

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn.

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