Apparel retail company The Gap, Inc. (GPS) is cutting off substantial jobs, reflecting the company’s troubled business conditions. The company is in the process of laying off roughly 500 corporate jobs, which accounts for about 5% of its 8,700 corporate employees. Softening demand and supply chain setbacks have hit the company’s retail footprint.

GPS has declined 64.6% over the past year and 52% year-to-date to close its last trading session at $8.47. It has declined 15.4% over the past month.

Here are the factors that could affect GPS’ performance in the near term:

Yeezy Deal Off The Table

Rapper Kanye West, who goes by Ye now, recently confirmed that he had terminated the deal between his company Yeezy and GPS. Allegedly, GPS had failed to meet the obligations of the agreement, which included the distribution of Yeezy products and creating dedicated Yeezy Gap stores.

The partnership was announced in June 2020 and was expected to continue through 2026. The first product in the Yeezy Gap line had sold out in hours. Wells Fargo had predicted that the partnership could bring in $1 billion in sales in its first year.

Bleak Financial Growth

For the fiscal second quarter that ended July 30, GPS’ net sales decreased 8.4% year-over-year to $3.86 billion. Non-GAAP net income declined 89% from the prior-year quarter to $30 million. Non-GAAP EPS came in at $0.08, down 88.6% from the same period the prior year.

Bleak Analyst Expectations

Street EPS estimate for the current year (ending in 2023) of a negative $0.27 reflects a decline of 118.8% from the prior year. Likewise, Street revenue estimate for the same year of $15.61 billion indicates a 6.4% year-over-year decrease. Its EPS is expected to decline 9.9% per annum over the next five years.

Lean Profit Margins

GPS’ trailing-12-month net income margin and levered FCF margin of a negative 2.40% and 7.00% are significantly lower than their respective industry averages of 5.86% and 1.80%. The stock’s trailing-12-month ROE, ROTC, and ROA of a negative 14.23%, 0.97%, and 3.11% compare to their respective industry averages of 14.98%, 6.91%, and 5.09%.

Mixed Valuations

In terms of its forward P/E, GPS is trading at 112.30x, 794.4% higher than the industry average of 12.56x. However, its forward EV/Sales multiple of 0.56 is 45.5% lower than the industry average of 1.03.

Its forward EV/EBITDA multiple of 16.02 is 96.8% higher than the industry average of 8.14, but its forward Price/Sales multiple of 0.20 is 74.6% lower than the industry average of 0.78.

POWR Ratings Reflect Bleak Prospects

GPS’ POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a Stability grade of D in sync with its five-year monthly beta of 1.73. GPS has a C grade for Value, consistent with its mixed valuations.

In the 67-stock Fashion & Luxury industry, it is ranked #57.

Click here to see the additional POWR Ratings for GPS (Growth, Momentum, Sentiment, and Quality).

View all the top stocks in the Fashion & Luxury industry here.

Bottom Line

GPS’ employee layoffs could make investors anxious. Moreover, the company’s Yeezy deal is off the table, which had the potential to boost GPS’ sales. On top of it, the company is struggling with a weak bottom line and low profitability. Hence, I think the stock might be best avoided now.

How Does The Gap, Inc. (GPS) Stack Up Against its Peers?

While GPS has an overall POWR Rating of D, one might consider looking at its industry peers, Hugo Boss AG (BOSSY) and J.Jill, Inc. (JILL), which have an overall A (Strong Buy) rating, and Chico’s FAS, Inc. (CHS) and Movado Group, Inc. (MOV), which have an overall B (Buy) rating.

GPS shares were trading at $8.43 per share on Monday morning, down $0.05 (-0.53%). Year-to-date, GPS has declined -50.54%, versus a -22.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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