Is Gap Stock a Buy?
Once the king of U.S. apparel, Gap (NYSE: GPS) hasn’t found a way to bring all of its brands into the next wave of style. Sales began to falter several years ago, and the stock descended steadily over the past three years until it bottomed out with the rest of the stock market in March of 2020.
But then a curious thing happened. Sales began to bounce back from coronavirus lows, and the stock gained almost 400% from the March dump. Gap stock closed out 2020 up 15% and is already up 6% in January as of this writing.
Are investors being overly confident, or is Gap a buy now?
New opportunities in the digital age
The Gap company comprises several brands, including Gap, Old Navy, Banana Republic, Athleta, and others. Old Navy is its largest brand, accounting for more than half of the total, and was also its highest-growth brand historically. But even Old Navy seemed to be getting stale in 2019, and the tiny Athleta, which accounts for only about 6% of total revenue, was the only remaining growth brand.
Image source: Gap.
But Gap has always been a leader in e-commerce, and that became ultra-important while customers stayed at home and accelerated digital as a purchasing option. Gap has a premier set of omnichannel shopping options, and it is the No. 2 retailer in U.S. apparel e-commerce sales. Digital sales increased 61% in the third quarter (which ended Oct. 31) and now account for 24% of total sales.
According to the NPD Group, fleece and activewear sales grew at a compound annual growth rate of 8% between 2017 and 2019. That’s a strong spot for Gap, and it was even more pronounced during the pandemic when customers ditched office wear for comfortable basics as they worked from home. Many continue to do so, benefiting athleisure makers like Nike (NYSE: NKE) and lululemon athletica (NASDAQ: LULU).
With its strong brands, impressive digital setup, and products that are meeting the moment, it makes sense that some investors are ready to take a chance on Gap’s stock.
Positioning for future growth
Gap ended the third quarter with 3.4 million new customers, a 145% increase over the prior year. Comps came in at 5% with flat sales, making this a crucial point in time for the company to ride the digital wave and reverse past declines.
Old Navy comps increased 17% over the prior year in the third quarter, and this brand has the best chance of keeping up the momentum. Athleta is in high-growth mode, and the company believes that these two brands will account for 70% of total sales, up from 63%, by 2023.
But there’s more to the story. The Gap and Banana Republic brands haven’t been pulling their weight for a while, and these brands remain a thorn in Gap’s side. Banana Republic may be worse off than before the pandemic hit, as its core product is a collection of office wear. While the ditching of corporate attire during the pandemic was a tailwind for most of the Gap’s brands, it’s a disaster for Banana Republic, and that brand’s comps suffered a 30% decrease in the third quarter. The Gap brand’s comps decreased 5%, as it still doesn’t seem to have found relevance in today’s market.
The company shared strategies for all of the brands in an October investor presentation, but I don’t find the discussion about a Gap brand revival — which comprises digital leadership, partners, new products, and profitability — incredibly compelling. Gap brand and Banana Republic accounted for 43% of sales in the third quarter, and they’re expected to shrink to less than 30% by 2023.
Gap is still a formidable presence on the retail landscape, and it has talented management that’s working with excellent resources. It survived a short period of cash pressure and is moving in the right direction. But I wouldn’t buy in just yet. I’m waiting for the company to make a bigger move with the Gap and Banana Republic brands, and to see more consistent overall progress.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.