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• Retail Comeback You Won’t Believe! 🤯 

Retail Comeback You Won’t Believe! 🤯 

Old Navy, Gap, Banana Republic, Athleta. They’ve all got one thing in common. They’re part of the retail giant GAP.

GAP’s been around for a long time. I remember when GAP for the go-to brand for Dad’s across the globe & you wouldn’t see their trainers on anyone else. But what’s happening behind the scenes right now is making them look like a pretty good investment opportunity.

The New Leadership Glow-Up 🌟

Gap, Inc. is not the same company it was just a few years ago. The big shift? New leadership, particularly Richard Dickson, their newest CEO. He’s the former President & Chief Operating Officer at Mattel (yes, the Barbie company), & he’s known for reviving brands. Exactly what GAP needed.

And he came in with a very clear checklist in mind.

Boost cultural relevance, streamline operations, and most importantly, get the company back to growing sales & profits. 💰

So what’s he done to tackle these issues head on?

1/ Rebranding & Cultural Relevance: They’re refreshing their image & making their brands feel current again. Think less “Dads at the park” and more “instagram influencer chic” 

2/ Cost Control & Inventory Efficiency: They’ve put a major focus on cost-saving measures. Over $300 million in operational expenses were cut in 2023 alone. That’s a big deal for profit margins. It wasn’t necessarily pretty. It came from job cuts, restructuring, better inventory management, leaner marketing spend along with my next point….

3/ Streamlined Store Portfolio: They’ve closed down underperforming stores. Over 300 of them! Sounds drastic but it makes sense to focus on locations that actually make money. Less overhead, more focus. 🎯

So What Do the Numbers Say? 📊

I don’t know about you, but I only want to invest in companies that are set to grow. So what story are the numbers telling after all these changes?

Well first of all, their last earnings report beat expectations across the board so I’ll count that as a big win.

Forecasts are that Gap’s next-twelve-months earnings per share (EPS) will be somewhere around $1.91. By 2025, somewhere closer to $2.24.

Why does this matter?

Well, earnings growth usually means stock price growth so it’s a good place to start.

If we use a price-to-earnings (P/E) ratio of 13.5x (for context, Abercrombie & Fitch & American Eagle both trade at around 19x so 13.5x is super conservative) , that’d give us price targets of around $26 (for short-term growth) and $30 (for a longer-term hold).

Right now, the stock is hovering around $21. That gives us an upside of 22%+ on the low end & 40%+ on the higher side.

That get’s my attention. 👀 

 Gap vs. Fast Fashion: How Do They Compete? 🥊

“Wait, It’s not that easy! Doesn’t Gap have to compete with all those fast-fashion brands like Zara, H&M, & Shein?” 

Yes. Yes, they do.

But Gap has something those brands don’t. Legacy & trust in the market.

People know Gap & Old Navy, especially when it comes to clothing for the whole family. And right now, in a tough economy, shoppers are like moths to a flame for brands that offer good value for money. That’s where Gap’s brands, particularly Old Navy, shine. 🌞

Here’s how Gap is staying in the fight 🥊

1/ Brand Relevance: They’re staying connected to their customers, rolling out campaigns that resonate with today’s trends (check out Old Navy’s “Linen Moves” campaign – it’s doing great)

And here’s the top comment on the Ad on Youtube with 5,000 likes so it must be resonating

2/ Supply Chain Efficiency: Gap’s massive scale helps them keep costs low & avoid some of the challenges smaller competitors face, especially in terms of rising freight costs or supply chain disruptions. Think of it like this. When shipping costs go up, who has more leverage to negotiate better pricing? A company like GAP looking to ship in huge quantities or smaller brand looking to scale distribution? 📦🚢

3/ High Quality at a Good Price: This is key. Gap, Old Navy, and Banana Republic offer clothes that are perceived as higher quality than your average fast-fashion brand. What pops into your head when you think of Shein? Or ASOS? For me, I don’t associate them with the same quality as I would with a brand like GAP. In a recession (or just a general downturn in spending), that’s a great spot to be positioned.

Key Hires = Big Moves 🏆

It’s not just Richard Dickson at the top making waves. Gap has brought in some big hitters with proven track records across the board.

Julia Leach at Athleta. Chris Blakeslee, formerly of Alo Yoga, who’s now leading Athleta as President. These hires are focusing on turning things around for their brands, which should boost sales & profitability across the entire company.

For example, Old Navy’s struggled with expanded sizing. That’s been put behind them now that they’re seeing momentum with mums bringing their kids back into stores. Athleta is shaking off some bad product decisions too & focusing on what consumers actually want. Functional & stylish activewear.🧘‍♀️

Why Should We Care as Investors? 💸

Gap’s transformation isn’t just about a struggling legacy brand trying to keep their head above water & save themselves from liquidation for old time’s sake. They’re positioning themselves for serious growth. And if you’re not interested in that as an investor, I don’t know why you’re reading this.😅 

Here’s some more reasons to be excited about the stock if you’re not already 👇️ 

1/ Q3 Earnings Beat? Gap’s been doing so well under new leadership that I think the Q2 earnings beat isn’t going to be a one-off. Sales are already picking up, & if they keep this up, I think we’ll see another beat for Q3.

2/ Recession-Proof (Almost): If the economy slows down, Gap is well-positioned to weather the storm. Why? Because people need clothes, especially for their kids. Old Navy offers affordable, quality options. Their brands hit that sweet spot of being good value for money, which is top priority when families are watching their spending.

3/ Dividends & Buybacks: Not only is there potential for 40%+ upside on Gap’s stock price, but they also offer dividends! Dividend yield currently sits at a health 2.8%. Plus, there’s rumours they might reintroduce a stock buyback program, which a) is a great signal that the company believes they’re undervalued and b) would reduce the number of shares on the market, making each remaining share worth more thanks to good old supply & demand. That’s assuming the demand for their shares stays constant or increases. 📈

Risks to Keep an Eye On ⚠️

If there was no risk, I’d be full porting this stock. But just like any investment there’s a few worst case scenarios we have to plan for.

So what are they for GAP?

1/ Fast Fashion Competition: I’ve covered this one already but just to reiterate - fast-fashion brands are aggressive. They’re all about sell at any cost & Gap needs to keep their finger on the pulse to keep up with them & ideally, out compete.

2/ Economic Slowdowns: There’s more & more recession worry in the air. Gap’s value-focused brands can weather downturns but a severe recession would still hurt there sales, just like a majority of companies on the market. While I’ve got this under “risks” if a recession were to playout & GAP took it on the chin without too much drama, it could make for an even better buying opportunity….

3/ Cost Increases: My bills are more expensive. You’re are probably more expensive, too. Same goes for Gap. Freight & raw material costs could rise due to global factors, like the conflict in Ukraine or rising tariffs with China. Gap’s size gives them an advantage here but it could still eat into the bottom line.

Now What? 🤔 

Gap, Inc. is in the middle of their Rocky cut scene where' they’re making an epic come back. With a strong leadership team, efficient cost management, & a clear strategy to drive sales growth, they’re well-positioned to thrive over the next few years.

The downside at the current price looks minimal. The upside looks huge. And the dividend yield gives me even more of a buffer.

Too good for me to pass up on 😋 

They’re not a sexy tech stock but they make sense as part of a diversified portfolio. I’ll keep position size small, somewhere around 1%ish & likely scale in if fundamentals stay the same & there’s any more drawdown in price.

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That’s all! See you same time next week 👋 

P.S Hit reply & let me know what you thought of this weeks newsletter. All feedback is welcomed ❤️