Apparel retailer Gap Inc. (GPS) has been taking several measures to recover from its COVID-19-pandemic lows and has been successful to a great extent. The stock has gained 35.5% so far this year to close yesterday’s trading session at $27.36. The company has been strengthening its digital channel. Also, its Power Plan 2023, which it unveiled in October 2020, has been well received by investors.

GPS  hit a fresh all-time high of $32.95 on March 15 after an analyst at Wells Fargo & Company (WFC) raised the shares’ price target. However, the company has  permanently closed several of its retail stores and is expected to close more stores in the near term in response to a third wave of coronavirus cases in many countries.

GPS also faces intense competition from the world’s largest online retailer Amazon.com, Inc. (AMZN). So, it’s expected that it will take some time before GPS can return to its pre-pandemic operational levels.

Click here to checkout our Retail Industry Report for 2021

Here’s what we think could shape GPS’ performance in the near term:

Athleta and Old Navy Brand Drive Sales Growth

As the demand for more casual and cozy apparel increased amid the pandemic, net sales by GPS’ Old Navy Global brand increased nearly 5% year-over-year to $2.38 billion for the fiscal 2020 fourth quarter (ended January 30, 2021). Its net sales from its Athleta brand also increased 29% year-over-year for the quarter.

Furthermore, In January, Athleta announced the expansion of extended sizing (1X-3X) to 350 styles across its collection. It also unveiled its first-ever sleep collection in January to capitalize on  changed consumer behavior.

Increasing Online Sales

GPS was able to stay afloat and its stock gained amid the pandemic based on its solid online sales. The company’s online sales grew 49% year-over-year in the fourth quarter, accounting for 46% of net sales. On February 24,announced its plans to open a new state-of-the-art Customer Experience Center in Longview, Texas to meet rising customer demand for online shopping as part of its strategy to achieve  future  digital growth.

Ongoing Store Closures

GPS closed a total of 344 retail stores in its fiscal 2020 (ended January 30, 2021) because of a significant decline in foot traffic. And with regions including  Europe witnessing a third wave of coronavirus infections, GPS  is expected to close more retail stores in the coming months, which could prove to be to its disadvantage. In fact, according to the fiscal 2021 outlook provided by GPS, it is expected to close roughly 100 Gap and Banana Republic stores globally in the coming months.

POWR Ratings Don’t Indicate Sufficient  Upside

GPS has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. GPS has a C grade for Quality, which is in sync with its 44.1% trailing-12-month gross profit margin, which is slightly higher than the industry average  33.3%.

It has a C grade for Growth also. This is justified given that analysts expect that its revenue will increase 46.4% year-over-year for the current quarter, ending April 30, 2021, but its EPS will remain negative for the same quarter.

In addition to the POWR Ratings grade we’ve just highlighted, one  can see GPS’ ratings for Value, Momentum, Stability and Sentiment here.

GPS is ranked #42 of 66 stocks in the B-rated Fashion & Luxury industry.

Better than GPS: Click here to access 21 top-rated stocks in the same industry.

Bottom Line

GPS has made an impressive comeback from its pandemic low last year, driven by solid online sales growth and continued strength in its Old Navy and Athleta brands. However, with rising COVID-19 cases in several countries, the company expects the pandemic-led impact to persist in the first half of it fiscal year 2021. So, we think GPS may not be a good buy with the potential  near-term headwinds in mind.

Click here to checkout our Retail Industry Report for 2021

GPS shares were trading at $28.06 per share on Thursday afternoon, up $0.70 (+2.56%). Year-to-date, GPS has gained 38.98%, versus a 4.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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