Gap (GPS) Loses 29% YTD: Can Growth Strategies Aid Stock?

Shares of The Gap, Inc. (NYSE:GPS) have lost 29.3% year to date due to persistent sluggishness at its namesake brand for quite some time now. We note that the brand has been witnessing lower traffic as well as operational headwinds. The stock has also underperformed the industry’s 23.5% decline. Let’s delve deeper.

Factors Hurting the Stock

In second-quarter fiscal 2019, comparable sales (comps) at the Gap brand fell 7%, wider than comps decline of 5% witnessed in the year-ago quarter. Softness across the brand has also been hurting the company’s overall comps and top-line performance.

The clothing retailer witnessed a 4% comps decline on soft comps across all brands. This coupled with adverse foreign currency translations weighed on its sales, which dipped nearly 2% in the fiscal second quarter. The metric also lagged the Zacks Consensus Estimate for the third straight quarter. In addition, the bottom line declined nearly 17.1% in the reported quarter on lower sales and margins as well as SG&A expense deleverage.

A bleak view for fiscal 2019 further weighed on investor sentiment. Gap expects comps to be down in low-single digits this fiscal year due to challenging traffic trends. Further, the company envisions adjusted earnings per share of $2.05-$2.15, suggesting a decline from $2.59 earned in fiscal 2018.

Brand Revitalization & Other Catalysts

Gap, which is likely to spin off into Old Navy and new Gap Inc., is trying various means to revive its flagship brand. It remains on track to revitalize the Gap brand by streamlining specialty fleet and enhancing marketing model to drive customer engagement. In relation to streamlining specialty fleet, it expects to shut roughly 230 stores by fiscal 2020. This is anticipated to result in a sales decline of $625 million annually. Management continues to estimate pre-tax costs of $250-$300 million. These restructuring measures are likely to generate annualized pre-tax savings of nearly $90 million.

Moreover, these actions will likely help generate 40% of sales from online. The remaining 60% will be realized from specialty and value channels. In fiscal 2019, Gap anticipates shutting nearly 130 stores to restructure the Gap brand fleet. All these efforts are likely to return the brand to growth.

In addition, the company’s omni-channel capabilities, including e-commerce and store expansion, are commendable. The company has expanded online presence across all brands. Notably, its online division is one of the most profitable segments, with robust sales growth. Gap has rolled out the Buy Online Pick up in Store (BOPIS) for its Old Navy brand throughout the nation, which is receiving positive customer response. Moreover, it remains committed toward store openings for Athleta and Old Navy as well as the Gap brand in China.

Meanwhile, Gap’s powerhouse brand, Old Navy, which is focused on creating affordable high-quality fashion for the whole family, remains a significant long-term growth opportunity for the company. The company has been experiencing significant progress in its smaller brands as well. Its digitally native men's active brand Hill City is consistently developing and remains a solid growth opportunity for the company. Furthermore, the company continues to benefit from the addition of the Janie and Jack clothing brand to its portfolio.

With that said, we expect this Zacks Rank #3 (Hold) stock to return to growth trajectory in the near term, courtesy of gains from brand strength, revitalization and omni-channel efforts.

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