Company Reports

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandizing and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, it was the second-largest individual apparel brand by retail sales in the United States in 2023, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for Old Navy (up from $8.2 billion in 2023) as achievable by the end of this decade. The concept, though, faces considerable competition in the discount apparel space and already has nearly 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have just over 1,400 locations in 10 years.

Overcoming a tough North American apparel market, Gap reported solid second-quarter results. Since joining the company last year, CEO Richard Dickson has implemented changes in personnel, merchandising, marketing, and operations that have reinvigorated its brands. Most importantly, Old Navy, which accounted for 57% of the quarter’s sales and is the main driver of profits, has returned to comparable sales growth (5% in the period). We expect to lift our $26 fair value estimate by a low-single-digit percentage, leaving shares a bit undervalued. Although we rate Gap as a no-moat company, we think it has strengths, including the high awareness of its brands and their appeal to many demographic groups.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandizing and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, it was the second-largest individual apparel brand by retail sales in the United States in 2023, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for Old Navy (up from $8.2 billion in 2023) as achievable by the end of this decade. The concept, though, faces considerable competition in the discount apparel space and already has nearly 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have just over 1,400 locations in 10 years.

No-moat Gap’s shares soared 23% in May 30 postmarket trading as first-quarter sales and profitability surpassed expectations despite uneven consumer demand for apparel. Although CEO Richard Dickson has a lot of work to do to generate consistent sales growth at each of Gap’s four brands while operating more efficiently, his personnel, product, and operating changes have already reinvigorated a company that had been floundering for years. We expect to lift our $24 fair value estimate on Gap’s shares by a high-single-digit percentage, but they are fully valued after the move.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandizing and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, it was the second-largest individual apparel brand by retail sales in the United States in 2023, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for Old Navy (up from $8.2 billion in 2023) as achievable by the end of this decade. The concept, though, faces considerable competition in the discount apparel space and already has nearly 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have just over 1,400 locations in 10 years.

Gap’s results beat our expectations in Richard Dickson’s first full quarter as CEO. While strong sales growth at highest-potential brands Old Navy and Athleta is elusive, the improvement in profitability supports our forecast of 7.5% operating margins by 2027. We do not expect to make any material change to our fair value estimate of $24 per share, keeping shares undervalued after they rose 6% in aftermarket trading on March 7. We rate Gap as a no-moat firm due to years of mismanagement and intense competition in apparel retail, but we are encouraged that Dickson appears to be tackling problems with changes in merchandising, management, and logistics.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandizing and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, it was the second-largest individual apparel brand by retail sales in the United States in 2023, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for Old Navy (up from about $8.3 billion in 2023) as achievable by the end of this decade. The concept, though, faces considerable competition in the discount apparel space and already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have just over 1,400 locations in 10 years.

Gap delivered third-quarter sales and earnings above our expectations, providing a dose of optimism in CEO Richard Dickson’s first quarter at the helm. While there is much work to be done, we think these results demonstrate that the firm’s efforts to cut costs and close underperforming stores while investing in its brands will bring a return to positive sales growth and mid-single-digit operating margins over the next two or so years. Gap’s shares rallied by 16% in Nov. 16 post-market trading on the report but remain well below our $23.50 fair value estimate, which we expect to raise by a low-single-digit rate. Although we assign a no-moat rating to Gap due to its chronic underperformance and the competitiveness of the U.S. apparel market, we believe it has strengths, such as the high awareness of its brands and their value proposition to consumers.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandizing and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, it was the second-largest individual apparel brand by retail sales in the United States in 2022, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for Old Navy (up from $8.2 billion in 2022) as achievable by the end of this decade. The concept, though, faces considerable competition in the discount apparel space and already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have just over 1,400 locations in 10 years.

Gap suffered same-store sales declines in each of its four banners in the second quarter, but cost-cutting brought a 3.4% adjusted operating margin that was 170 basis points above our forecast. As we do not think Gap can cut its way to prosperity, generating sales growth at Old Navy and Gap’s other segments will be the priority for new CEO Richard Dickson. Unfortunately, it will likely take time for progress on this front to be apparent given that inflation and other factors are depressing consumer spending on apparel this year. That said, we do not expect to make any material change to our $23.50 fair value estimate on Gap and view shares as very undervalued. Although we rate it as a no-moat company, we think Gap has strengths, including Old Navy’s historically strong sales growth and profitability and Athleta’s potential in the women’s activewear space. Moreover, despite its struggles, Gap has no near-term debt maturities and is poised for significant free cash flow improvement; its free cash flow to equity improved by more than $900 million in the first half of 2023, and we believe Gap will continue to pay its dividend (6% current yield).

No-moat Gap has named Richard Dickson, president and chief operating officer at narrow-moat Mattel, as its CEO. Gap has been without a permanent CEO for an entire year, having been led on an interim basis by Bob Martin, who remains as chairman. Dickson was credited with revitalizing Barbie, Hot Wheels, and other brands at Mattel and has apparel industry experience at multi-brand owner The Jones Group and upscale department store Bloomingdale’s. At Gap, he will face serious challenges, including recent underperformance at Old Navy and Athleta, and the chronic search for relevance at Gap Global and Banana Republic. Realistically, Gap has struggled to find consistency since former CEO Mickey Drexler was fired more than 20 years ago.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, it was the second-largest individual apparel brand by retail sales in the United States in 2022, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for Old Navy (up from $8.2 billion in 2022) as achievable by the end of this decade. The concept, though, faces considerable competition in the discount apparel space and already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have just over 1,400 locations in 10 years.

Gap’s shares rallied 14% in post-market trading after it reported an unexpected (small) profit in 2023’s first quarter. We rate it as a no-moat company and acknowledge its challenges but also think consistent profitability is achievable and that its current valuation reflects an extreme level of pessimism. We do not expect to make any material change to our $23.50 per share fair value estimate.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, it was the second-largest individual apparel brand by retail sales in the United States in 2022, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for the Old Navy (up from $8.2 billion in 2022) as achievable by the end of this decade. The label, though, faces considerable competition in the discount apparel space and already has more than 1,200 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have just over 1,400 locations in 10 years.

Closing a painful year, Gap underperformed our modest expectations in 2022’s fourth quarter. Moreover, its guidance for a mid-single-digit percentage sales decline in 2023 is disappointing. Even so, we are encouraged that the firm (even with an interim CEO) is not standing still as, in conjunction with the earnings report, it announced $300 million in cost savings in addition to the $250 million identified last year. Moreover, Gap has made major organizational and personnel changes and expects to name a permanent CEO soon.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2025. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have about 1,500 locations in 10 years.

No-moat Gap reported a dose of positive news in an otherwise trying year as its third-quarter results were better than expected. Much work needs to be done, though, as the company remains without a permanent CEO and high discounting is expected in the holiday period due to elevated inventories and slowing consumer spending. Indeed, the firm projected its sales to drop by a mid-single-digit percentage in the fourth quarter, shy of our negative 1% estimate. Still, we believe Gap’s shares are undervalued in relation to our $25 fair value estimate, which we do not expect to change materially.

Investors have forsaken apparel manufacturers and retailers, which we believe present numerous attractive opportunities. These firms have struggled with many issues in 2022, including higher inventories, lower operating margins, inflation, logistical challenges, tough comparisons with 2021, low international travel, and an extremely strong U.S. dollar. However, we see positive signs. In recent weeks, shipping has shown signs of normalizing, and gas prices have dropped. Moreover, we anticipate inventory levels will improve as manufacturers cancel shipments and sales increase in the holiday season (as is typical). In 2023, we anticipate the benefits of investments in supply chains and other operations by many apparel firms will become more apparent. Consequently, despite widespread pessimism in the market, we believe now is a good time to consider the many apparel stocks trading well below our fair value estimates.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2027. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have about 1,500 locations in 10 years.

We believe Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and we view its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, we view Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2027. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As we are wary of the potential of these markets, we do not view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, we forecast it will have about 1,500 locations in 10 years.