Is Gap Inc. Destined for Greatness?

Megaclothier Gap has been a steady performer for years, but its best days seem to be behind it.

Jan 21, 2014 at 2:35PM

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Gap (NYSE:GPS) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The charts you're about to see tell Gap's story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while the debt-to-equity ratio declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Let's take a look at Gap's key statistics:

GPS Total Return Price Chart

GPS Total Return Price data by YCharts.

Passing Criteria

3-Year* Change


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

(18.5%) vs. 11.2%


Improving EPS



Stock growth (+ 15%) < EPS growth

106.7% vs. 55.9%


Source: YCharts. *Period begins at end of Q3 2010.

GPS Return on Equity (TTM) Chart

GPS Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25%



Free cash flow payout ratio < 50%



Source: YCharts. *Period begins at end of Q3 2010.

How we got here and where we're going
Gap manages a mediocre four out of nine possible passing grades on today's assessment. The company's revenue and profit margin growth have been crimped by a weak economic recovery, and the competitive fashion industry isn't doing it any favors, either. Gap's free cash flow has also started to fall far from its net income over the past few quarters -- however, the company can still easily support its dividend payouts at the current cash flow levels. How might Gap return to a growth mindset in 2014? Let's dig a little deeper to find out.

Over the past few quarters, Gap has been pushing hard into the yoga apparel sector long dominated by lululemon athletica (NASDAQ:LULU), and Under Armour (NYSE:UA), to a lesser degree. Fool contributor Andres Cardenal notes that the company has launched several Athleta stores near Lululemon locations to siphon off the latter's traffic by selling relatively cheaper products. Gap has also partnered with yoga instructors to offer a number of health and fitness classes in a rather blatant copycatting of Lululemon's strategy. In addition, Gap has benefited from its rival's recent stumbles: Last year, Lululemon had to recall many yoga pants due to a state of near-transparency under certain conditions, which is probably not the kind of visual most yoga-pant wearers want to project in the gym. Lululemon still receives numerous complaints over its product quality and poor customer service responses. Under Armour is capitalizing more directly on this fiasco, as it's recently begun a marketing campaign for its studio yoga line that makes light of Lululemon's "sheerness" problem.

Gap also had a stronger-than-expected holiday shopping season, as November and December sales rose by approximately 2% and same-store sales increased by 1% year over year. Consequently, the company delivered a strong earnings guidance for the fourth quarter. This doesn't necessarily point toward major long-term growth -- a 2% improvement barely keeps up with expected rates of inflation. In contrast, Urban Outfitters (NASDAQ:URBN) continues to benefit from higher-end brands Anthropologie and Free People, which saw same-store sales soar by 21% and 11%, respectively. Gap currently trades at a much lower valuation than Urban Outfitters -- its P/E is barely more than 13, compared to Urban Outfitters' P/E of 20 -- which could point toward either a superior value or a value trap, depending on one's opinion of Gap's future. Fool contributor Mukesh Baghel notes that Gap has an excellent track record of returning cash to shareholders: It recently announced a new $1 billion share repurchase plan, which has made it by far the best of its peers when it comes to reducing the number of shares outstanding:

GPS Shares Outstanding Chart

GPS Shares Outstanding data by YCharts.

According to YouGov BrandIndex, the Gap and Banana Republic brands have gained significant traction over the past few months, which is a positive for potential future sales growth. Fool contributor Brian Hill notes that Gap has been focusing on overseas expansion, opening 25 stores in Asia in the fourth quarter. Gap has also collaborated with new designers and brought out innovative new products, which might further improve perceptions and lure more customers to its stores.

Putting the pieces together
Today, Gap has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Looking a great stock idea?
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Under Armour, and Urban Outfitters. The Motley Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers