Renowned specialty retail apparel company The Gap, Inc. (GPS) announced its fiscal third-quarter earnings (ended October 30, 2021) on November 23, 2021. GPS’ net sales fell 1.3% year-over-year to $3.94 billion, despite a 48% increase in online sales from the 2019 levels. Operating income fell 12.6% from the same period last year to $153 million. The company’s net loss came in at $152 million, reflecting a substantial decline from the year-ago net profit of $95 million. Loss per share came in at $0.40, missing the analyst estimates by 46%. Following the third-quarter earnings release, the stock declined 26.3% to close Friday’s trading session at $17.33.

GPS has cited supply chain constraints due to factory closures and port congestions as the main reason behind its poor performance in the last quarter. The significant delays in deliveries affected the company’s inventory margins as well as sales, as it was not able to meet the strong market demand.

GPS’ management stated that it has been working to increase air freight and port diversification to meet the demand this holiday season. However, with the rising concerns surrounding the omicron coronavirus variant leading to the reimposition of travel restrictions worldwide, GPS’ inventory shortfall will likely continue throughout the fiscal fourth quarter (ending January 2022).

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

Legal Investigation

Nationally ranked shareholder rights firm Labaton Sucharow announced on November 27 that it is investigating whether GPS violated certain securities laws and fiduciary duties. Law firm Bronstein Gewirtz & Grossman, LLC is also currently investigating whether the company’s officers and/or directors have engaged in corporate wrongdoing on behalf of shareholders who invested in GPS before August 1, 2020.

Mixed Valuation Metrics

In terms of forward P/E, GPS is currently trading at 19.62x, 20.4% higher than the industry average of 16.3x. However, the stock’s forward Price/Sales and EV/EBITDA ratios of 0.38 and 8.65 are 68.5% and 15.8% lower than the industry averages of 1.23 and 10.27, respectively.

In addition, GPS is currently trading 5.44 times its forward cash flow, which is 57.4% lower than the industry average of 12.76.

Poor Growth Prospects

The consensus revenue estimate of $4.54 billion for the current quarter (ending January 2022), indicating a slight improvement year-over-year. However, analysts expect GPS’ EPS to remain negative in the ongoing quarter, indicating a 121.4% decline year-over-year. Also, the company’s EPS is expected to fall 22.9% in the next quarter (ending April 2022).

Consensus Rating and Price Target Indicate Potential Upside

Of the 15 Wall Street analysts that rated GPS, three rated it Buy, while 12 rated it Hold. The median price target of $24.43 indicates a 40.3% potential upside. The price targets range from a low of $20.00 to a high of $29.00.

POWR Ratings Reflect Uncertainty

GPS has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

GPS has a Quality grade of B, and a Stability grade of D. Its 49.23% trailing-12-month gross profit margin is 37.5% higher than the industry average of 35.82%, in sync with the Quality grade. However, the stock’s 1.67 beta justifies its poor Stability grade.

Of the 63 stocks in the Fashion & Luxury industry, GPS is ranked #48.

In addition to the grades I’ve highlighted, view GPS ratings for Momentum, Value, Sentiment, and Growth here.

Bottom Line

GPS is one of the most famous apparel retailers in the United States, known for its Old Navy, Gap, Athleta, and Banana Republic brands. While the company witnessed stable demand over the last quarter as consumer spending increased substantially, its operations were adversely impacted by the ongoing supply chain constraints. Given the current speculations surrounding the omicron coronavirus variant, the supply chain crisis is expected to continue over the next few months. Thus, investors should wait until GPS comes up with concrete plans to deal with such constraints before investing in the stock.

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

While GPS has a C rating in our proprietary rating system, you might want to consider taking a look at its industry peers, Hugo Boss AG (BOSSY), Shoe Carnival, Inc. (SCVL), and Genesco Inc. (GCO), which have an A (Strong Buy) rating.

GPS shares . Year-to-date, GPS has declined -10.35%, versus a 25.48% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

More...