It’s the holiday season, and good economic times or bad, that means shopping. Whether you’re flush with cash because you bought NVIDIA (NVDA) in the $100s or you’re working 3 jobs and can’t believe the cost of a Thanksgiving meal, gifts must be bought…at price points large and small. 

So let’s talk about 2 retailers that might bring some holiday joy, and the possibility you’ll have a nice return before the next holiday season rolls around. These retailers operate in very different markets, but the stocks of Gap (GPS), and American Outdoor Brands (AOUT) are in the bargain bin this holiday season, and may turn out to be the steals of the year. 

First, Gap (GPS) launched higher after its recent earnings report handily beat consensus estimates, but at close to $19 is still almost 50% off of its 2021 highs. Gap may be becoming the quintessential turn around story late in 2023. The good earnings this week popped the stock out of the base it’s been forming since early 2022.

CEO Richard Dickson was pleased to report the company had seen “market share gains as well as improvements in both gross margins and operating margins” that are allowing it to “put the company on stronger financial footing [and is] enabling us to focus on reinvigorating our portfolio of brands, [and] strengthening our operating platform…” 

Dickson was able to report gross margins increasing 390 basis points to 41.3% YoY. The company has seen a decline in inventory levels, and was buoyed by lower freight and commodity costs. 

Currently GPS owns and operates Gap, Banana Republic, Old Navy, Athleta, and Intermix. A highlight of the recent quarter was the continued updating of the Banana Republic brand, and its release of BR Home. BR Home is an upscale furniture and home decor line that seems well timed for a drop in mortgage lending rates, and what may be the bottom of the current pull back in existing home sales…which are at 13 year lows. 

The new brand is a continuation of the retailer’s attempt to move up the value chain, and includes handcrafted furniture, and a much higher price point, items range from $150 to $5,000, than for products in its discount Gap stores.     

In our POWR Ratings GPS gets an overall B rating, with a score of 82.43%. It really shines in the growth component where the stock ranks above 96.44% of all the stocks in our extensive database. 

GPS seems to be on the cusp of a nice turn in the company, and stock, and may be timing its revamp perfectly as inflation drops and we see a possible interest rate cut mid-2024.

Another company which is not exactly turning around, but is more letting the market catch up to it is American Outdoor Brands (AOUT). Because of the pandemic, and the need for everyone to isolate and at the same time spend time with close family in recreational activities, American Outdoor had what Wall Street calls a pull forward of earnings…and boy was it a doozy of a pull forward. 

Now, while “growth” has slowed, it is actually back to the growth trajectory the company was on prior to the pandemic. It was an upward trajectory, but couldn’t match the stock price spike caused by the pandemic, once it had ended. Now the stock has returned from the stratosphere to a reasonable valuation, and may be ready to move higher.

The company operates a number of brands, several of which it has been able to expand as outdoor activities have stayed a staple for many even after the pandemic. American is pushing a strategy, what it terms “Dock and Unlock” to move its current brands forward, and expand brand categories. 

A perfect example is fishing. AOUT has expanded its BUBBA brand of fishing knives into the “water to plate lifestyle”. This means you can now get BUBBA coolers, backpacks, and fish scales, not just knives. This strategy of brand expansion has turned BUBBA into one of the fastest growing brands at American. And the company is rolling the strategy out for its over 20 other brands as well.  

In its latest earnings release the company increased gross margins to over 45%, and from its last pre-pandemic quarterly report increased revenue 31%. The company trades at only 0.63 times sales and only 0.62 times book value. 

American Outdoor Brands comes in with a stellar overall rating of 98.21% in our POWR Ratings. Its strongest component rating is in the Sentiment category where it sports an over 99% rating, but it is also well over 90% in both Growth and Value.

What To Do Next?

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GPS shares rose $0.04 (+0.21%) in after-hours trading Wednesday. Year-to-date, GPS has gained 76.82%, versus a 20.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA. More...

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