Gap CEO resigns. Should we take advantage of the fall in the stock?

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The CEO of clothing retailer Gap (GPS) recently resigned, which appears to have weighed on its share price. With the stock in a downtrend, will it make sense to invest in it now? Keep reading to find out….


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Clothing retail company The Gap, Inc. (GPS) offers apparel, accessories and personal care products under the Old Navy, Gap, Banana Republic and Athleta brands.

On July 11, GPS announced that the general manager Sonia Syngal would leave her position on the company’s board of directors. Bob Martin, the company’s current executive chairman of the board, has been named interim chief executive, effective immediately. GPS also announced that Horacio “Haio” Barbeito will join the position of President and CEO of Old Navy.

Since then, the stock has fallen 2.2% to close its last trading session at $8.71. GPS is down 71% over the past year and 50.7% since the start of the year. Additionally, it is currently trading below its 50-day and 200-day Moving averages of $9.71 and $15.39, signaling a downtrend.

Here are the factors that could affect GPS performance in the short term:

Grim balance sheet

For the fiscal first quarter ended April 30, GPS net sales decreased 12.9% year-on-year to $3.48 billion. Net income decreased 197.6% from the prior year quarter to negative $162 million. EPS was negative $0.44, down 202.3% from the same period a year earlier.

Analysts expect declines

The EPS consensus estimate of negative EPS of $0.03 for the quarter ending July 2022 indicates a 104.3% year-over-year decrease. Street EPS estimate for the current year (fiscal 2023) of $0.05 reflects a 96.5% decline from the prior year. Similarly, Street’s revenue estimate for the same year of $15.71 billion indicates a 5.8% year-over-year decline.

Lean profit margins

GPS’s trailing 12-month EBIT margin and EBITDA margin of 1.99% and 5.17% were 77.7% and 56.7% below their respective industry averages of 8.92% and 11.94% . Its 12-month ROTC of 2.09% is 70.8% below the industry average of 7.16%.

The stock’s trailing 12-month ROE and ROA of 2.74% and 0.59% are significantly below their respective industry averages of 16.73% and 5.55%.

POWR ratings reflect bleak outlook

GPS’ POWR Rankings reflect these bleak outlooks. The stock has an overall rating of D, which is equivalent to Sell in our proprietary rating system. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

GPS has a growth and sentiment rating of F in line with its sluggish bottom line growth over the past quarter and bleak analyst growth expectations.

The stock also has a stability rating of D, consistent with its five-year monthly beta of 1.73.

In stock 68 Fashion & Luxury industry, it is ranked #65.

Click here to see additional POWR ratings for GPS (Value, Momentum and Quality).

See all the top fashion and luxury industry stocks here.

Conclusion

The departure of the company’s CEO seems to have weighed on its action. On top of that, GPS is struggling with bottom line losses and low profitability is a concern. Also, with analysts expecting a decline in GPS EPS for the current year, I think the stock is best avoided now.

How does The Gap, Inc. (GPS) compare to its peers?

Although GPS has an overall POWR rating of D, one might consider looking at industry peers J.Jill, Inc. (Jill) and Hugo Boss SA (AUTHORITARIAN), which have an overall rating of A (Strong Buy), and Chico’s FAS, Inc. (CHS) and Weyco Group, Inc. (WEYS), which have an overall rating of B (buy).


GPS shares were trading at $8.75 per share on Wednesday afternoon, up $0.04 (+0.46%). Year-to-date, the GPS is down -48.66%, compared to a -15.99% rise in the benchmark S&P 500 over 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.

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