The shares of iconic retail company The Gap, Inc. (GPS) have declined by 12.2% over the past month. Investors’ concerns over its sale of Janie and Jack in April 2021 and its  proposed sale of Intermix could explain this decline. However, GPS has stated that these moves are part of its Power Plan 2023, in which  the company aims to focus on its core brands, such as Old Navy and Athleta, to drive its sales. The stock has gained 183.9% over the past year and 55.1% year-to-date to close yesterday’s trading session at $31.31.

GPS got a boost in terms of positive investor sentiment after it introduced the first item —a new, recycled blue nylon jacket—from its collaboration with YEEZY Apparel on June 8. Furthermore, the company announced in April that Athleta will be expanding its footprint into Canada later this year.

So, GPS’ prospects seem bright because the company is expected to continue benefiting from its growing digital presence and increasing foot traffic at its retail stores as major economies continue to recover and gradually lift COVID-19 related restrictions.

Click here to checkout our Retail Industry Report for 2021

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

Power Plan 2023 Playing Out Well

As part of its Power Plan 2023, last month GPS sold Janie and Jack to Go Global Retail and has agreed with Altamont Capital Partners  to sell Intermix. These moves have  not been well received by all investors. However, Sally Gilligan, GPS’ Head of Strategy said, “The sale of Janie and Jack and planned transaction of Intermix demonstrate how we are prioritizing our strategic focus and resources behind the growth and potential of Old Navy, Gap, Banana Republic and Athleta.”

The company partnered with Walmart Inc. (WMT) on May 26, 2021, to introduce Gap Home, a new brand of home essentials available exclusively at WMT. GPS also entered into new, long-term credit card program agreements with Barclays PLC (BCS) and Mastercard Incorporated (MA) in April 2021 as part of its Power Plan 2023 to enhance its rewards program to attract new customers and retain the existing ones.

Solid Financials

GPS’ net sales for its fiscal first quarter, ended May 1, 2021, were  $3.99 billion, up 89.4% year-over-year. The company’s comparable sales in its  Old Navy Global segment increased 35% year-over-year, and  sales by its Athleta segment increased 27% year-over-year. GPS’ online sales for the quarter increased 82% versus the first quarter of 2019. And its  net income for the quarter was  $166 million compared to a $932 million loss in the prior-year period. Its non-GAAP EPS increased 71.4% sequentially to $0.48.

Favorable Analyst Estimates

Analysts expect GPS’ annual revenue to increase 24% year-over-year to $17.12 billion in its fiscal year 2022. The company’s EPS is expected to grow 341.2% for the current quarter, ending July 31,  72% for the quarter ending October 31,  and 182.9% in  2022.  Wall Street analysts expect the stock to hit $36.39 in the near term, which indicates a potential 16.2% upside.

POWR Ratings Show Promise

GPS has an overall A rating, which equates to Strong Buy 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 an A grade for Momentum, which is in sync with its 84.3% gains over the past nine months and 44.8% returns over the past six months.

The stock has a B grade for Value, which is consistent with its 1x forward EV/S, which is 39.8% lower than the 1.66x industry average. In terms of forward P/S, its 0.70x is 48.9% lower than the 1.37x industry average.

GPS has a B grade for Quality, which is in sync with its 47.45% trailing-12-month gross profit margin, which is 37.3% higher than the 34.55% industry average. It also has a B grade for Growth, consistent with analysts’ expectations that its revenue and EPS will increase.

In addition to the POWR Ratings grades we’ve just highlighted, we’ve also rated GPS for Sentiment and Stability. Get all the GPS ratings here.

GPS is ranked #10 of 65 stocks in the A-rated Fashion & Luxury industry.

If you’re looking for other top-rated stocks in the same industry, with an Overall POWR Rating of Strong Buy or Buy, you can access them here.

Bottom Line

Even though GPS had to close some of its stores amid the COVID-19 pandemic, its business has been growing solidly  through  its Old Navy and Athleta brands, online sales and various strategic partnerships. With major economies gradually recovering from the pandemic, we think it is wise to bet on GPS now given its significant growth potential and reasonable valuation.

Click here to checkout our Retail Industry Report for 2021

GPS shares were trading at $32.04 per share on Friday morning, up $0.73 (+2.33%). Year-to-date, GPS has gained 59.98%, versus a 13.87% 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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