Apparel retail company The Gap, Inc. (GPS) offers apparel, accessories, and personal care products under the Old Navy, Gap, Banana Republic, and Athleta brands. The company offers its products through its operated stores, franchise stores, Websites, third-party arrangements, and catalogs.

On August 15, GPS declared a third-quarter dividend of $0.15 per share, payable to shareholders on or after October 26, 2022. Its annual dividend of $0.60 yields 6.67% on prevailing prices. However, the company’s dividend payouts have declined at a 17.7% CAGR over the past three years and a 10.1% CAGR over the past five years.

GPS has declined 60.9% over the past year and 46.1% year-to-date to close its last trading session at $9.52. It has declined 5.7% 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 1.71%. 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 15.28%,7.09%, and 5.12%.

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, consistent with its five-year monthly beta of 1.73.

GPS has a C grade for Value. This is justified as its forward P/E multiple of 126.23 is 811.1% higher than the industry average of 13.85, but its forward EV/Sales multiple of 0.58 is 47.2% lower than the industry average of 1.09.

In the 67-stock Fashion & Luxury industry, it is ranked #58.

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’ Yeezy deal is off the table. On top of it, the company is struggling with a weak bottom line and low profitability. Moreover, with analysts expecting GPS’ EPS for the current year to decline, I think this dividend stock might not be the right addition to one’s retirement portfolio.

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 H & M Hennes & Mauritz AB (HNNMY), which have an overall B (Buy) rating.

GPS shares were trading at $9.41 per share on Tuesday morning, down $0.11 (-1.16%). Year-to-date, GPS has declined -44.79%, versus a -18.49% 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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