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Gap: 2 Bad Businesses Are Hiding 2 Good Ones

Jul. 26, 2018 5:00 AM ETThe Gap, Inc. (GPS)10 Comments
Vince Martin profile picture
Vince Martin


  • On a consolidated basis, Gap looks cheap, trading at barely 6x EBITDA and 11.5x the midpoint of FY18 EPS guidance, and deservedly so given margin pressures and weak growth.
  • But Old Navy alone appears to be driving as much as three-quarter of total profit - and on its own could support the entire enterprise value here.
  • Athleta offers another growth driver, while Gap brand and Banana Republic cloud the picture.
  • SOTP valuations suggest reasonable upside - but there are questions and risks toward unlocking that value.

I was a long-time bear on Gap (NYSE:GPS) for some time, even shorting the stock back in 2016. Few companies seemed more at risk from sector-wide pressures on mall retailers and a noted move away from corporate brands toward local and unique (a shift happening not just in apparel, but in food & beverage as well).

But my tone has softened of late, even as GPS stock rose from 2016 lows below $18, settling in the past few months around $30. Despite earnings pressure, I think CEO Art Peck has done a nice job and at the least owned up to the challenges facing the industry, and the business, something other retailers have been slow to do. Old Navy has rebounded with a 6% same-store sales increase in FY17 (ending January of this year). The balance sheet is reasonably clean, with net cash on the books as of the end of Q1. Despite a disappointing Q1, Gap looks better (to my eye, anyway) than it did several quarters ago.

In fact, it looks like a pretty solid buy at the moment - despite consolidated numbers that appear to be going in the wrong direction. At a conference last year, Gap disclosed for the first time brand-level operating margin information. Those figures suggest that Old Navy is driving as much as three-quarters of profit for the business. That in turn implies that with GPS at rather low multiples (6.1x EV/EBITDA on a TTM basis, 11x+ the midpoint of FY18 EPS guidance), Old Navy alone could support the entire enterprise value of Gap Inc. at the moment. In essence, that would give investors at the current price Gap brand, Banana Republic, and athleisure concept Athleta for free.

It's not a perfect case, to be sure. Investors don't trust Old Navy to the extent of

This article was written by

Vince Martin profile picture
Overlooked Alpha launched April 2022 - subscribe at overlookedalpha.com. Some OA articles are also available here at Seeking Alpha.I've been contributing to Seeking Alpha and other investment websites since 2011, with a general (though far from rigid) focus on value over growth. I got my Series 7 and 63 back in 1999, and watched the dot-com bubble peak and then burst in real time at a small, tech-focused retail brokerage in NYC.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GPS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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