Gap Inc. Stock Profile

GPS:NYSE

This week I am profiling the clothing company, Gap Inc. (Gap). In addition to Gap and GapFactory, Gap owns the following other brands: Banana Republic, Old Navy, Athleta (athletic wear) and Intermix (a collection of specialty boutiques from established and emerging designers). I am interested to profile Gap this week because it has been part of my life for almost 30 years. I kind of have a special place in my heart for this store! I grew up in a rural area and stores with really fashionable clothes were almost 2 hours away. I discovered the Gap when I was about 12 on a "big city" shopping trip and I realized that I could actually get the cool jeans and clothes I saw in the magazines! I remember thinking “So this is where you can get jeans that look and fit like that!” Ever since then, the Gap has definitely been my go to store to get nicely designed clothes at a decent price. Once I started working in an office environment, my interest expanded to Banana Republic which has also served me well for almost 20 years. Now that I have children, I frequently buy their clothes at Gap and Old Navy. I would also note that shopping online for Gap brands is one of the best online shopping experiences I have had. The real people reviews are excellent and mostly accurate and it is easy to find products, ship them and return them.   

Gap is a classic and has stayed more or less consistent over the years which has no doubt contributed to its success. You know you are going to be able to find something that works for any look or season and that is what I think most people would associate with the Gap brand. Maybe I am being melodramatic, but I have fond memories of the Gap! When I look back at my old photos, I can see so many Gap clothes in them and I definitely have some nostalgia associated with the brand.

·     As stated many times on this site, I, nor ZSM Creative Inc. operating as The Capital Pink, are financial advisors and have no financial accreditations. I am applying some basic evaluation tools to this stock along with some commentary but this should only serve as a starter for your further research. The information below is only current to the day this post was written which may or may not be the same day as this post was published so please update the ratios and numbers to the current day before relying on them as they may have significantly changed (see How Do I Evaluate a Stock? (Part One) for information on where to find the ratios and numbers online). Please read my Legal Disclaimer.  Also, I do not own Gap Inc. stock and am not affiliated with them in any manner.    

What is Gap?

Gap needs little introduction. I am certain most of you have spent time in a Gap or related brand store. Gap was created by husband and wife, Doris and Don Fisher because Don could not find a pair of jeans that fit. They went on to open the first Gap store on Ocean Avenue in San Francisco in 1969. The name “Gap” was a reference to the generation gap. It went public in 1976 with 1.2 million shares of stock. It acquired Banana Republic in 1983 and the first GapKids store was opened in 1986. Its first store outside of the US was opened in London in 1987. Old Navy came along in 1994 and it acquired Athleta in 2008. Gap entered China in 2010 and in 2013, Intermix was acquired. I had never heard of Intermix before writing this post. It is a higher end brand for Gap and is a mix of designers presented as though one is shopping in a boutique. 

Gap and Banana Republic are considered mature brands in the stable of the company and there is not much further growth expected in many ways. Athleta and Old Navy in contrast are higher growth brands that have more room to move upward. With this background in mind, here are some further insights in to Gap as an investment:

·      Value and Online channels are 5 times more profitable than the speciality line – Value consists Old Navy and Gap Factory, Active consists of Athleta, Speciality is Gap and Banana Republic and Online is of course, shopping off the website;

·      Has reduced its store footprint by 650 stores to account for more growth online and in the value area;

·      Athleta – large growth potential and international opportunity to expand with this athleisure brand;

·      Old Navy – strategy is fast, curated fashion for value. Competes with Ross, Zara, H&M and other fast fashion stores;

·       Overall company strategy is to Grow the Value and Active brands, Accelerate the Online and Mobile aspects of the company and Reduce Speciality (so closing of lots of Gap and Banana Republic stores). Just recently, Gap announced it was opening more Old Navy stores as it fulfills this aspect of its growth;

Gap is also highly committed to sustainable practices and has been introducing many in the last few years. Gap recognizes the leverage it has a large international clothing company to affect change within the fashion industry and is committed to finding new ways of doing things. For example, Gap for Good denim is made with 20% less water than conventional methods. This alone saves nearly 65 million litres of water per year which is the equivalent of what San Francisco uses in one day. By 2021, 100% of the cotton used in Gap clothing will be ethically sourced. By 2020, 80% of Athleta’s materials will be made with sustainable fibres. It’s This Way Ahead program hires youth from low income communities. 

Like most retailers, the Gap is facing increased competition from Amazon which is leading the way in online clothing shopping. I personally think the strength of the Gap brand will keep it relevant for some time to come. You know what you are going to get and they are excellent at keeping on top of trends and moving new styles in and out quickly. I, for one, will continue to be shopping at Gap, Old Navy and Banana Republic for the foreseeable future.  

What is Gap’s stock doing?

As at April 23, 2018, the numbers from our basic stock evaluation tools are as follows:

Share price: $29.23 USD

One share of Gap Inc. would cost you $29.23 USD.  The price over the past 52 weeks has ranged from $21.02 to $35.68 USD. This is a fairly narrow range, the stock has not jumped up and down relatively speaking over the past year. This would seem to be fairly representative of the solid, value stock that is Gap.  

Price to Earnings (P/E): 13.45

Recall this is the stock price divided by the earnings per share. If the P/E is high, you should expect to get some growth for having paid a bit more for the stock however, it could indicate the stock is overvalued. The Index P/E is 21.33 so Gap is quite a bit lower than the index. This is a lower growth stock. The 5-yr average P/E is 13.82  so the P/E has stayed the same over the past five years. Again, the Gap is more a steady stock rather than something from which you are going to get a lot of growth.    

Dividend Yield: 3.24%

Dividend paying stocks are something many investors look to buy as they are like an interest rate on your shares. Dividend payouts are discretionary. Dividend yield represents the amount the company pays out in dividends relative to its share price. While a higher dividend yield is usually more desirable, you still need to consider the health of the underlying company before making a generalization either way. The 5-yr average for Gap’s dividend yield is 2.77% so again, very consistent over the past few years. With a low growth stock like Gap, you would be looking for some upside which could be in the form of its dividend payments. 

Earnings per Share (EPS): 2.14

This figure will tell you a great deal about the growth of the company. It takes what the company earns and divides it by the number of shares outstanding. It is essentially the profit allocated to each share of the company. The bigger the number the better because the more the company earns, the more attractive it is to investors. EPS that is increasing every quarter shows earnings momentum and shows growth potential. Gap's EPS has maintained fairly steady over the past five years again, indicative of its stability and low growth nature. 

Revenue: $15.86 Billion 

Increasing revenue is a good sign that the company is growing. Again, not surprisingly, Gap’s revenue growth has been very small at 0.26%. It has been steady around the $15 to $16 Billion mark. This is not surprising but interesting to consider given there has been such little growth in revenue. It really makes you consider the overall company and where it is headed given such low growth.  

Return on Equity (ROE): 28.04

ROE tells you what sort of return the company is getting on the shareholders money. An increasing ROE is a good sign. Gap’s ROE has jumped around somewhat with a 5-yr average at 35.18% but has generally remained steady.  

Market Capitalization: 11.4302 Billion

Gap is a large cap stock.  Recall that small cap stocks usually have the most room for growth as opposed to large, established, stable large cap companies and medium fall somewhere in the middle. Gap is a large cap stock that has stagnant growth. It is steadily maintaining its metrics but the numbers do not appear to show much growth in the future.  

Net Profit Margin: 5.35 (TTM)

This ratio tells us what profit is left over after the company pays its expenses for the year. The more money it keeps, the better. High net profit margins mean that a company is good at keeping profit after expenses are paid, which may mean they are adept at keeping their expenses down. It is a good idea to compare these over an industry to see what companies are good at operating and maintaining a high net profit margin. 

Free Cash Flow per Share: 2.30

Recall that this number is the cash flow through the business divided by the number of shares outstanding. It represents the net cash a company can produce per share and many investors consider this a better indicator of a company’s health than the more popular, earnings per share ratio because it is more difficult to manipulate cash flow numbers than it is earnings numbers. A higher value usually indicates the company is in a healthier position. It shows the cash that the company actually holds that could be distributed out to shareholders without impacting the continued development of the company.  

This ratio should be considered along with the EPS figure for a better picture of the company’s health as there should not be a wide discrepancy between the two figures. If there are large variances between those numbers, you may want to consider if there were large, non-recurring one-time items that account for the large variance. It is also wise to look at a company’s cash flow picture in the long term as that should take into account one-time, large capital expenditures (money spent by a company to buy or maintain an asset like land, buildings or equipment, i.e. “fixed assets”) that required large amounts of cash. A low free cash flow per share could also mean the company is earning less profit. 

In this instance, Gap's free cash flow per share would appear to be small and much smaller than Booking Holdings from last week of around $80. That is a considerable difference although further research is required to determine the reasons behind each figure. 

Price to Sales (P/S): 0.72

This ratio compares the total market value of the company with its sales revenues. There is not a great deal of manipulation a company can do with its sales data, so this can be a good indicator of how well the company is doing. Recall that a lower ratio relative to its peers in the industry can indicate a potentially good investment opportunity. Morningstar indicates the index is 2.13 so Gap is somewhat lower than the index.  

Price to Book (P/B): 3.56

This compares the stock price with how much the stock would be worth if the company was liquidated or sold off. It is the value of the stock in comparison to the underlying assets of the company. Thus, a low P/B relative to the stock price suggests you are not paying too much for what would be left over after such a sell off. Morningstar states that the index for P/B is 3.07.

Price to Cash Flow (P/CF): 8.26

Having cash left over after expenses are paid off is crucial to remaining in business so this is a good indicator about the health of a company. Generally lower is better as it could indicate the company is obtaining large cash flows not yet reflected in the stock price. Morningstar indicates the index is 13.69 so Gap is lower on this metric. 

Overall, a clear picture of Gap emerges when you analyze its stock price and other metrics - Gap is a low growth stock. Does this mean it is a bad stock to purchase? Not necessarily. Gap Inc. is still doing well all things considered in the retail environment. It is effectively holding its own. Its Athlete and Old Navy brands still have growth within them. It also pays a dividend and it is still managing some growth in certain areas. As I talked about above, I have a soft spot for Gap and as long as it is around, I will be checking out its latest designs both in store and online!