These brands are best differentiated by price points: Gap is focused on current essential fashions at midpoint prices, while Old Navy is discount current fashion. Banana Republic is more of a luxury brand that is focused more on classic and timeless clothing as opposed to fashion.
The Gap also operates Athleta, a rapidly growing premium fitness apparel store for women that the company acquired in 2008. Sales at Athleta are up 48% since the start of the pandemic and up 18% in the most recent quarter. Athleta opened Athleta Girl in 2016 and began selling sleepwear on 2020.
Old Navy is the largest of the company’s brands, accounting for 54% of sales in the January 2022 fiscal year. Gap Stores accounted for 24%, Banana Republic for 12%, and Athleta for the remaining 10%.
The past decade has been a very frustrating one for Gap shareholders. Revenues did not grow between the January 2014 and the January 2020 fiscal years, barely advancing from $16.1 billion to $16.4 billion. Margins came under pressure from a competitive retail environment and spending on new store concepts.
Also, despite share buybacks that retired 22% of outstanding shares, EPS fell from $2.74 to $1.97 over the same period. During this period, the price of GPS stock fell from over $40 a share in 2014 to under $20 a share by the end of 2019.
When the pandemic led to operating losses, Gap management took action, initiating Power Plan 2023 to improve results. Under this plan, the company sought to grow the profitable Old Navy and Athleta brands, close underperforming stores and increase online sales. Non-core businesses, including baby store Janie and Jack and men’s fitness store Intermix, were divested.
The plan seemed to have some success initially. The first half of the January 2022 fiscal year was a strong one, with revenues up 6.3% and operating income 8.5% higher from the same period in pre-pandemic 2019.
Investors were very encouraged and bid the stock up to over $36 a share. However, higher freight costs and supply chain shortages dampened the second half of the year, especially for the key Old Navy brand, and the stock fell back to below $20 again.
Still, I do not think the January 2022 fiscal year was a bad one for GPS, with diluted EPS of $1.44 a share and sales up 2% from 2019 levels despite the extraordinary expenses and sales shortages related to the supply chain. Extra air freight alone cost the company $0.80 a share in earnings. So, all things considered, fiscal 2022 was a decent year for the company.
Now, GPS has become a “show me” story for fiscal 2023. There is some market skepticism surrounding the company’s guidance for EPS of $1.85 to $2.05 in the current fiscal year. However, I believe this guidance is actually reasonable. A bigger contribution from online sales and the more profitable Old Navy and Athleta names should drive a continued expansion in merchandise margins.
While the number of Gap stores is shrinking, the remaining ones have been doing well. Sales comparisons are very easy in the second half of the year, and the cost pressures should ease at that time as well.
I am confident GPS will earn at least the low-end of their guidance in the current year. At just 8X EPS of $1.85 in the current year, there is too much negativity priced into the stock, as there are several good things going on at GPS. I expect the negativity to lift sometime this year, and then the stock should do very well. Buy GPS under $17. My target is $21.