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Does Gap's Online Sales Surge Make It a Buy?

By Adria Cimino – Sep 3, 2020 at 7:00AM

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Gap gained millions of new online customers in the recent quarter. Now it's important to see if they'll come back.

Prior to the coronavirus outbreak, Gap (GPS -3.47%) was at the start of a new chapter. The struggling mall retailer had just named Sonia Syngal, who had worked wonders at the helm of its Old Navy business, as chief executive officer of the whole company.

Then came the recent health crisis. We could have expected a disaster for Gap, but the situation hasn't been as bad as we might have imagined. Just recently, Gap reported a surge in online sales in the second quarter.

Almost all stores were temporarily closed at the start of the period. But do gains in online sales mean now is the time to bet on recovery at Gap? Let's take a closer look.

A woman, wearing a mask, holds shopping bags as she stands in front of a brick wall.

Image source: Getty Images.

Performance in e-commerce

Gap's sales fell 18% year over year during the second quarter. At the same time, online sales soared 95%. And the company added 3.5 million new online customers -- that's a 165% increase compared with the same period the year before.

While the digital gains are absolutely encouraging, it's important to put them into perspective. Most retailers have seen strong performance in e-commerce during the period of store closures, as consumers have preferred staying home even once stores have reopened. Companies including American Eagle Outfitters, Target, and lululemon athletica all posted significant increases in their most recent earnings reports.

Considering that these "coronavirus quarters" aren't like usual times, to confirm that digital is really taking off, it's often helpful to look into the digital growth situation prior to the outbreak. We might imagine that if a company was successfully growing digital then, the trend may continue after the health crisis subsides. But Gap's situation is different since Syngal took on her role recently and has plans for recovery and change. What happened pre-Syngal isn't as significant.

So what does this mean? We need sales results from at least one quarter in which stores are open for the full period and consumers are somewhat back to their usual routines. The next quarterly report may be key.

It's important for Gap to make progress in e-commerce because more and more consumers opt for online shopping -- and this trend might increase as people remain wary of crowds post-coronavirus. Last year, global retail e-commerce sales totaled $3.5 trillion, and sales are expected to climb by 85% by 2023, according to Statista. Strengthening online sales also is important because of declines in malls, where many Gap stores are located.

Athleta's sales rise

Another bright spot in the earnings report had to do with Gap's Athleta brand. As consumers turned to casual clothing with offices closed and telework becoming more widespread, Athleta's net sales rose 6%, carried by a 74% increase in online sales.

That's encouraging for Athleta, but it isn't necessarily good news for all of Gap's brands. Banana Republic struggled during the period as consumers didn't buy clothing to be worn to the office. Net sales fell 52% at that business. And net sales were down for all of Gap's brands except Athleta.

Overall, Gap has managed the crisis well, so far. The company ended the quarter with more than $2 billion in cash and cash equivalents, and inventory was down by 4% compared with the year-earlier period. The company also plans on closing more than 225 Gap and Banana Republic stores this year.

So is Gap a buy? Not yet. The shares have already climbed almost 250% from their April low. While the less-than-$6 stock price at that time was unjustified, the recent gains also have been excessive, considering the lack of visibility. Right now, the stock is trading slightly higher than Wall Street's 12-month average price forecast.

Before deciding to buy shares of this retailer and truly believing in Gap's recovery, I want to see another quarter of earnings data.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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