Over the past six months, Gap’s stock price fell to $20.59. Shareholders have lost 16.4% of their capital, which is disappointing considering the S&P 500 has climbed by 3.7%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Gap, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Gap Not Exciting?
Despite the more favorable entry price, we're swiping left on Gap for now. Here are three reasons why GAP doesn't excite us and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Gap’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Gap’s revenue to rise by 1.3%. While this projection indicates its newer products will fuel better top-line performance, it is still below the sector average.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Gap historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.1%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.
Final Judgment
Gap isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 8.8× forward P/E (or $20.59 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of Gap
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