The retail landscape looks depressing in general, but for retailers that were facing challenges prior to inflation, it looks downright miserable. Current economic trends are only exacerbating real problems. So even if a company posts better-than-expected results, it needs to be viewed in the larger scheme of internal and external factors.
Wall Street has a price target of as much as 116% higher for Gap (GPS -0.67%) stock, but I'm remaining cautious about it. Here's why.
Internal factors
Gap has been having trouble growing its business for years. It's been at its game for decades, so staying relevant requires agility and meeting shifting trends. But Gap has been unable to do that well.
Its core Gap brand, which focuses on basics, hasn't motivated shoppers for a long time. Further, its premium Banana Republic brand, which used to be a standard for office wear, has become less relevant in an era leaning toward casual and athleisure. Even Old Navy, its longtime growth generator, has lost touch; and Athleta, which should be having a moment, isn't.
Net revenue in this year's first quarter declined 6% over last year. Gap sales fell 13%, Banana Republic dropped 10%, Old Navy decreased 1%, and Athleta sales were down 11%. The company's net loss totaled $18 million, an improvement over $162 million last year. Adjusted net income, which accounts for a building sale and restructuring costs, came to $3 million, or $0.01 in earnings per share (EPS), beating analyst estimates of a $0.16 loss per share. Gap is still a $15 billion company, but that's less than it was 10 years ago.
GPS Revenue (Annual) data by YCharts.
Gap has been through a string of CEOs over the past few years, and each has failed to remedy the situation in a meaningful way. Most recently, management had its hopes pinned on Sonia Syngal, who led Old Navy to prominence. However, her efforts were thwarted during the pandemic, and she stepped down last summer. The company still has not appointed a successor, and it's not surprising that it's taking its time to get the right person into the driver's seat. It still can't seem to find its place in the new world of retail.
The company has taken many actions to recover sales growth and boost its brand. It has revamped its branding several times, with Banana Republic currently a label of adventure. It missed some huge opportunities with Athleta, which has performed well and meets current athleisure style demand. Recently though, it just missed market cues for styles and patterns, and customers passed it over for other brands.
It's also making efforts to cut costs, such as selling off its China business and continuing to streamline its physical footprint. It reduced store count from more than 1,200 in 2019 to an estimated 866 in 2023.
External factors
The external factors may be weighing most heavily on Gap stock, but they're less worrisome as a whole. After all, they affect all retailers. However, Gap may be struggling with them more because its other troubles make it more susceptible to external pressure.
Management mentioned that its Old Navy brand is feeling the impact of inflation. Even though it's a low-price option, its target market is feeling the pinch more than those of brands targeting affluent shoppers.
Many stocks look like good buys today because their sales are being impacted by inflation, but their growth strategies appear intact. That means lower prices spell long-term opportunities. However, I don't see that as a compelling case for Gap.
Too risky today
Investors liked what they saw in the first-quarter results, and the stock is up more than 7% since the report. The improvements in profitability are impressive, and it looks like Gap is taking real action to maintain that trend.
However, I still don't hear a solid plan to become relevant with customers again. It didn't even try to say it has one as it has in the past. Gap is waiting for a new CEO to revitalize the company, and it's also waiting out economic volatility so that there could at least be outside momentum to nudge sales higher.
Until the company picks a new CEO, designs a practical strategy, and then makes it happen, I would sit this one out. It's just too risky right now.
