San Francisco-based The Gap, Inc. (GPS - Get Rating) offers apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. The company’s board of directors recently approved plans to increase the company’s annual dividend per share by 25% to $0.60 in its fiscal year 2022.

However, GPS expects its 2022 revenue growth to be in the low single-digit percentage range, with first-quarter net sales expected to be down by the low- to mid-teens. The stock has declined 20.8% in price over the past month to close yesterday’s trading session at $11.72. In addition, it is currently trading 68.9% below its 52-week high of $37.63, which it hit on May 18, 2021. So, GPS’ near-term prospects look uncertain.

Here is what could influence GPS’ performance in the upcoming months:

Lower-Than-Industry Valuation

In terms of forward P/S, GPS’ 0.26x is 71.6% lower than the 0.93x industry average. Likewise, its 3.52 forward P/CF is 65.1% lower than the 10.10x industry average. And the stock’s 0.53x and 0.65x respective forward non-GAAP PEG and EV/S are lower than the 0.95x and 1.16x industry averages.

Top Line Growth Does Not Translate into Bottom Line Improvement

For its fiscal fourth quarter, ended Jan. 29, 2022, GPS’ revenue surged 2.3% year-over-year to $4.53 billion. However, its operating income for the quarter decreased 94% year-over-year to $8 million. Its net loss came in at $16 million, compared to a $234 million gain in the prior-year period. And its loss per share came in at $0.04, compared to EPS of $ 0.61 in the year-ago period.

Low Profitability

In terms of trailing-12-month net income margin, GPS’ 1.54% is 76.4% lower than the 6.50% industry average. Likewise, its trailing-12-month ROTA of 2.01% is 66.7% lower than the 6.03% industry average. Furthermore, the stock’s trailing-12-month EBIT margin and ROCE of 4.91% and 9.60%, respectively, are lower than the 9.29% and 17.65% industry averages.

POWR Ratings Do not Indicate Enough Upside

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. GPS has a D grade for Growth and Sentiment. This is justified because analysts expect its EPS to decline 85.4% in the current quarter and 17.1% next quarter.

The stock has a C grade for Quality, which is in sync with its lower-than-industry profitability ratios. In addition, GPS has a C grade for Stability, which is consistent with its beta of 1.70.

GPS is ranked #57 out of 67 stocks in the Fashion & Luxury industry. Click here to access GPS ratings for Value and Momentum.

Click here to checkout our Retail Industry Report for 2022

Bottom Line

GPS is currently trading below its 50-day and 200-day moving averages of $14.38 and $20.70, respectively, indicating a downtrend. Also, it could keep losing in the near term due to concerns over supply chain disruptions and inflation. So, we think it could be wise to wait for a better entry point in the stock.

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

While GPS has an overall POWR Rating of C, one  might want to consider investing in the following Fashion & Luxury stocks with an A (Strong Buy) rating: J. Jill, Inc. (JILL - Get Rating), Hugo Boss AG (BOSSY - Get Rating), and Caleres, Inc. (CAL - Get Rating).

GPS shares fell $0.05 (-0.43%) in premarket trading Monday. Year-to-date, GPS has declined -32.45%, versus a -10.02% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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