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The Gap: Lay Off Ahead Of Q1 Earnings

May 03, 2022 7:54 AM ETThe Gap, Inc. (GPS)18 Comments
Nikola Lapenna profile picture
Nikola Lapenna


  • The Gap will release Q1 earnings before the end of the month.
  • Low margins are being squeezed due to the global supply chain crunch and because Old Navy, the flagship brand, isn't growing.
  • The company’s recent refinancing is positive, but it doesn’t mean capital will be utilized efficiently.
  • The stock trades near its enterprise value and is not worth buying; price target of $15 with an 18-month view.

Gap Closes Flagship Store In San Francisco

Justin Sullivan/Getty Images News


This report provides a slightly bearish case against The Gap (NYSE:GPS), citing weak forecasts by leadership, continued margin squeeze, and low brand strength. The model forecasts a $14 share price target, and I rate this stock as “Hold”.


This article was written by

Nikola Lapenna profile picture
With over three years of finance and consulting experience, Nikola is laser focused on finding value in forgotten and beaten down public equities. His professional experience includes corporate credit risk analysis, consulting for government entities, and venture capital analysis in the med-tech space. An avid golf fan, Nikola enjoys picking stocks that need a "mulligan"; a sluggish quarter that sees market sentiment trend downward doesn't scare Nikola. Nikola is not a licensed financial advisor and nothing in his commentary here on Seeking Alpha should be regarded as advice. All of his opinions are his own, and not on behalf of any other entities.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.

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Comments (18)

My granddaughter works at Old Navy. She says that people come in and shoplift from the store and nobody is allowed to stop them or risk being fired. The thieves know this and keep repeating it. I don’t see much future in a company that allows this to happen.
@NZK91G Where do you/she live?
@alexalekhine I live in Hawaii, but she lives and works in Michigan. Surprisingly in a safe rural area. Not a crime ridden area like Detroit.
@NZK91G Very interesting.
I take issue with you calling Gap "Fast Fashion."

Would it not be more accurate to say that they sell classic basic fashions, instead?

When I hear "Fast Fashion" I think "some new wrinkle in clothing design."
That's the opposite of what I think when I think Gap/Old Navy et. al., which is: I know in advance what I want and I know that Gap brand store will have exactly what I am looking for.
OptionsJohnny profile picture
@alexalekhine so you can quickly get from problem to solution. What you just described is what’s meant by “fast”
GR Value profile picture
Looks like not many white suburban people want to pay 5x fair value for Kanye's trash just saying. Who didn't see this coming after the Kanye pump/dump hype through Gap.

Gap is an okay company but it's troubled. I much prefer other companies frankly.
OptionsJohnny profile picture
Great review. Thank you for sharing.
Today I sold a few puts for the first time in GPS to take advantage of the volatility. I still believe that Athleta has a ton of potential ever since I learned that Lululemon can't put patents on their expensive pieces of clothing. Athleta can manufacture those same products at lower prices, and should be worth at least 20% of Lulu's valuation imo, which amounts to $7B. Their products are great and just as good as Lulu imo, and whether you sell some leggings for $120 (Lulu price) or under $60 (Athleta price since they often run promotions, and Lulu basically never does) you'll still get fantastic margins. Since GPS only has an EV of $10B, the other three parts just have to be worth $3B to make sense to me. I hope they sell some of the other parts.
Kanye West has become an embarrassment. Management didn't even talk about him on the last earnings call. I think that particular "catalyst" has pretty much run his course.

GPS is a fun stock to follow, but the stock price never really goes anywhere, because EPS never really goes anywhere. I think that in the long run, Old Navy is going to be a problem, since quality is absolute garbage and pricing isn't nearly low enough to reflect that.

GAP and Athleta have potential. Banana Republic at least has some class. Old Navy is just a problem. Either it needs to be refreshed with higher quality apparel (in which case it basically just becomes GAP), or it should be sold before it declines further. Neither option is great.
Nikola Lapenna profile picture
@HPBunker well said. I just don't see the catalysts or operating efficiency needed to break out
@Nikola Lapenna I don't understand this answer/response.
Please explain.
Alex Syku profile picture
Hey great analysis! You really went in-depth on current business struggles and their sluggish growth concerns.

I was confused at one part of the article. When you used a 16% WACC, you added the cost of debt and the cost of equity. If it is weighted average cost of capital, shouldn't you weight debt by the % of debt in their capital structure and equity by the % of equity. In addition, using the 3.75% rate and 21% tax rate, cost of debt come out to 2.96% not 1.19%. As for your cost of equity, a 1.7 beta, 3% risk free, and 8% expected return on equities would mean a cost of equity of 11.5%.

Using these costs of equity and debt and using market value weights (45% for equity, 55% for debt), the WACC comes out to about 7.7%, this should increase your discounted fcf/continuing value. In addition, there are 383 million diluted shares outstanding (you used 365M).

While your business model is spot on, your valuation approach could be reworked using the 7.7% WACC. This should lead to a higher price target.
Nikola Lapenna profile picture
@Alex Syku Hi Alex, great points - thanks for commenting. I made a few WACC adjustments that I agree with you on. Regarding shares outstanding, given the recent few years of share buybacks, that total is a forecast. But overall thanks - that change tweaked my price target but overall I still believe this stock is a hold.
Nice review
Nikola Lapenna profile picture
@SV999 thanks for reading
Athleta seems promising but their legacy brands have work to do in this high rate environment. Good article!
Nikola Lapenna profile picture
@MMInvests Thanks for reading - good point!
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