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Why Gap Inc Stock Was Climbing Today

By Jeremy Bowman - Dec 12, 2019 at 4:15PM

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Shares of the retailer were gaining in reaction to a potential trade agreement.

What happened

Shares of Gap Inc (GPS 4.32%) were gaining today along with much of the retail sector after President Trump announced this morning on Twitter that China and the U.S. were getting "very close to a big deal." This afternoon, news broke that the two sides had reached a deal on "phase one."

The news sent retail stocks up broadly as the sector has been sensitive to trade negotiations due to the effect of tariffs on the industry. As a result of Trump's announcement, the SPDR S&P Retail ETF was up 2.1% as of 3:23 p.m. EST, while Gap was trading up 5.7%.

A group of men and women in t-shirts and jeans

Image source: Getty Images.

So what

Though there was no specific news out on Gap, the development in trade negotiations was enough to lift the stock as other beaten-down retail names like The Children's Place also gained significantly. 

Like much of the retail industry, Gap imports a significant percentage of its merchandise from China, making it sensitive to tariffs. In 2018, 21% of its merchandise was purchased from factories China, and the company said in its 10-K report that product cost increases resulting from tariffs could have an adverse effect on its business. 

Earlier in the year, Gap management had said that tariffs could cost it as much as $0.06 in earnings per share for the year.  While that may not seem significant, Gap is performing badly at the moment, and it needs all the help it can get. Comparable sales at its three major chains, Gap, Banana Republic, and Old Navy, are all falling, and just forced its CEO out after years of underperformance. Additional tariffs likely mean higher prices or the company's needing to absorb some of those costs, adding to its many problems.

Now what

According to Bloomberg, the phase one deal would suspend tariffs that were set to go into effect on Dec. 15 and reduce existing ones. The deal is now awaiting Trump's signature and is especially timely for retailers, coming with nearly two weeks left in the holiday season. Sector stocks could climb once the agreement is signed and the full text is made public.

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