Gap, Inc. (GPS - Get Rating) and Macy’s Inc. (M - Get Rating) are two of the world’s most established companies in the retail sector. They offer a wide range of merchandise, including apparel and accessories. GPS operates primarily through its brands — Old Navy, Gap, Banana Republic, Athleta, Intermix, Janie and Jack, and Hill City; while M operates mainly through its brands — Macy’s, Bloomingdale’s and Bluemercury.

While physical retail stores in general suffered a major setback amid the COVID-19 pandemic (with patrons fearing to leave their homes to go shopping), both GPS and M witnessed significant growth through their online sales channels. Going forward, as consumers become more comfortable with this fast and efficient online way of shopping, these companies are expected to cultivate a wider customer base.

GPS has returned 160.7% over the past nine months, while M gained 110.9% over the same period. In terms of the past month’s performance, M is a clear winner with 7.5% returns versus a decline by GPS. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

In late November GPS announced that Asheesh Saksena will join the company’s senior leadership team as Chief Growth Officer. The company also appointed Sandra Stangl as its  new President and CEO of Banana Republic. Also, through a virtual investor meeting held on October 22, the company unveiled its Power Plan 2023 strategy and provided an economic framework for the company going forward.

GPS announced a new partnership with India’s Ministry of Rural Development (MoRD) on October 5. The partnership is designed to reach thousands of young men and women over the next three years by leveraging GPS’ Personal Advancement and Career Enhancement (P.A.C.E.) program. And on September 24, GPS launched a new loyalty program across the United States and Puerto Rico, with branded expressions across each of its core brands.

M offered various unique items for last-minute shoppers across all price points on macys.com, on its mobile app, and through its stores nationwide. The company offered same-day delivery through DoorDash Inc. (DASH) until December 23, and contactless curbside pick-up until  December 24. Effective December 7, the company named Malek Robert Amirshahi as its  senior vice president for its corporate communications.

To celebrate black excellence in fashion, the company announced on October 29 that it will launch limited-edition seasonal collections throughout 2021. Each collection will feature pieces by Zerina Akers, Misa Hylton, Aminah Abdul Jillil, Allen Onyia and Ouigi Theodore. M also collaborated with the Culpo sisters in October, on an exclusive ready-to-wear collection, Culpos X INC International Concepts.

Recent Financial Results

GPS’ revenue has surged 22% sequentially to $4 billion for the third quarter ended October 31, 2020, driven primarily  by growth in online sales, which increased 61% year-over-year. For the Athleta brand, comparable net sales increased 37% year-over-year, representing the highest yearly growth in the brand’s history. The company recovered in the third quarter, reporting positive net income and EPS compared to negative values in the second quarter. Its reported net income and EPS were $95 million and $0.25, respectively, for the third quarter.

M’s net sales for the third quarter ended October 31, 2020 increased 12.1% sequentially to $4 billion. Its digital sales have increased 27% year-over-year. Driven by disciplined inventory management, better sell through of both full-price and clearance merchandise, and lower clearance markdowns, the company’s gross margin improved by roughly 12 percentage points sequentially to 35.6%.

So, GPS is in a more advantageous position here.

Expected Financial Performance

The market expects GPS’ revenue to increase 46.1% for the quarter ending April 2021, and 13.3% in 2022. The company’s EPS is expected to grow 93.6% for the quarter ending April 2021, and 159.2% in 2022.

In comparison, , the market expects M’s revenue to increase 39.5% for the quarter ending April 30, 2021, and 17.7% in 2022. The company’s EPS is expected to grow 85.2% for the quarter ending April 30, 2021, and 124.6% in 2022.

Thus, GPS has an edge over M here.

Profitability

M’s trailing-12-month revenue is 1.4 times GPS’. However, GPS is more profitable, with a gross margin of 46.8% versus M’s 33.5%.

Again, M’s leverage free cash flow margin of 9.5% compares favorably with GPS’ 6.6%.

Valuation

In terms of trailing-12-month P/S, GPS is currently trading at 0.54x, more expensive than M, which is currently trading at 0.18x. Though M is less expensive in terms of trailing-12-month EV/S (GPS - Get Rating), its trailing-12-month EV/EBITDA of 536.16x is much higher than GPS’ 82.59x.

In terms of trailing-12-month price to book, GPS’ 3.20x is higher than M’s 1.61x.

Though GPS looks slightly more expensive compared to M, we think it’s worth paying this premium considering GPS’ significantly higher earnings growth potential.

POWR Ratings

Both GPS and M are rated “Neutral” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for GPS and M:

GPS has a “D” for Trade Grade, and Peer Grade, a “C” for Buy & Hold Grade, and a “B” for Industry Rank. It is currently ranked #33 of 66 stocks in the Fashion & Luxury industry.

M holds a “C” for Trade Grade, and Buy & Hold Grade, a “D” for Peer Grade, and a “B” for Industry Rank. It is currently ranked #36 in the same industry.

The Winner

Both GPS and M are good investment bets considering their market dominance and continued expansion. However, GPS appears to be a better buy despite trading at a marginally higher valuation based on its higher earnings growth potential.

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GPS shares were trading at $19.99 per share on Tuesday afternoon, down $0.32 (-1.58%). Year-to-date, GPS has gained 14.59%, versus a 17.59% 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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