Gap Inc’s (NYSE: GPS) stock has lost more than 30% of its value since the beginning of the year, with it share price shrinking from largely around $25 at the beginning of the year to around $17 now. While investors remained optimistic about Gap’s future prospects after its decision to spin-off its Old Navy business earlier this year, the overall slowdown in the apparel industry in the wake of the U.S.-China trade war has hurt the company’s performance over recent months. For the most recent quarter, Gap’s same-store sales were down 4%, while they had been flat in the year-ago quarter. Comparable sales for Old Navy Global and Banana Republic slid 4% and 3% respectively while Gap Global’s comparable sales dropped by 7%. Overall, net sales of the company declined 2% y-o-y to $4 billion, while adjusted EPS shrunk nearly 50% (year-over-year) to $0.37.
Notably, the company lowered its full-year guidance for earnings and revenues recently. We have detailed the key components of Gap’s valuation in an interactive dashboard, along with our forecast for full-year 2019. Based on our forecast for Gap’s key metrics, we arrive at a $18 price estimate for Gap’s stock, which is slightly ahead of the current market price.
Below we provide a detailed explanation of the key factors that could impact the company’s valuation:
Gap Global Shows No Signs Of Improvement
- Gap Global has struggled over the last few years and has delivered negative comp growth over this period – a trend that continued into Q3. The brand’s comp sales figure fell 7% in Q3 – identical to a 7% reduction in the prior-year period.
- Total revenues declined by 10% y-o-y to $1.1 billion. Weakness across the brand can be attributed to operational headwinds in the business as well as to assortment issues.
- Nevertheless, the brand’s profitability improved in the quarter thanks to an increase in gross margin from its ongoing efforts to cut costs.
- Gap continues to work towards revitalizing the brand along with its restructuring efforts. The company has closed more than 70 stores in the first nine months of the year and expects to close 60 more over the last quarter. In addition, the company remains focused on improving its inventory composition and product assortment.
Old Navy’s Growth To Slow Down
- Old Navy is the company’s largest brand-accounting for nearly half of the company’s revenues. However, the brand’s growth has slowed down in 2019 with the brand delivering negative comparable sales growth in each of the last three quarters.
- Old Navy’s comparable sales were down 4% in Q3 – in sharp contrast to a 4% increase in the previous-year quarter.
- Moreover, the brand’s revenue remained flat at $2 billion.
- Old Navy’s performance struggled because traffic trends remained soft due to its limited product offerings.
- However, online trends for the brand remained strong as the brand delivered double-digit growth in traffic and conversion during Q3 2019.
- For full-year 2019, we expect the brand’s revenue to increase by 2% to just shy of $8 billion.
Athleta Brand Continues To Thrive
- The ‘Athleisure’ segment remains a major growth driver for the apparel industry. Gap’s Athleta brand delivered a strong performance in Q3 2019, further improving its market share, with the Girls business continuing to be a consistent growth lever, delivering another double-digit comp quarter.
- Athleta has been Gap’s fastest-growing segment of late, and we expect the momentum to continue through Q4 and beyond.
- Moreover, the company has opened 24 new Athleta stores so far this year and plans to add another 6 stores in Q4 2019 which should support the brand’s growth momentum.
Additional details about trends in Gap’s Banana Republic and Other segment revenues are available in our interactive dashboard.
Per Trefis estimates, Gap’s adjusted EPS for 2019 is likely to be $1.73. Taken together with a P/E multiple of 10.1x, this works to a fair value of $18 for Gap’s Stock which is slightly ahead of the current market price.
We also highlight how Gap’s P/E multiple has trended over the years, and compare this key metric with that for its peers L Brands, American Eagles and Urban Outfitters in our interactive dashboard.
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