Is This the Darkest Before the Dawn for Gap Stock?

Key Points

• The Company is seeing declines on all metrics  
• Inventories rose 32% in Q2
• Gap shares pay a 6.38% annual dividend

Clothing and apparel retailer The Gap NYSE: GPS has had a bad year with shares down (-54%) in 2022. The Company fired its last CEO in July after an abysmal Q1 earnings report and is currently seeking a new CEO. Almost every metric disappointed in the most recent Q2 earnings report with sales down (-8%), comparable sales down (-10%), online sales fell (-6%), merchandise margins fell 850 basis points while inventories swelled by 32%. Even Kanye gave them the boot terminating their partnership, which wasn’t producing well anyway. Gap also pulled their full-year 2022 outlook due to uncertain macroeconomic conditions rife with high inflation, rising logistics costs, and waning consumer discretionary spending. The consumer pullback has affected most of the retail industry as evidenced by warnings from Kohl’s NYSE: KSS, Nordstrom NYSE: JWN, Target NYSE: TGT, and Walmart NYSE: WMT. Inflation sabotaged 200 basis points while $50 million in airfreight costs took another 130 basis points off its gross margin. With all the bad news striking its stock, the Gap may be setting itself up as a turnaround play if this is truly the darkest point before the dawn. The Company has set the bar low for expectations moving forward by pulling its expectations. As shares continue to fall towards pandemic lows, investors have to wonder if the worst has been priced in.

Put a Bag Over It

On Aug. 25, 2022, the Gap released its second-quarter fiscal 2022 results for the quarter ending July 2022. The Company reported earnings-per-share (EPS) of $0.08 excluding non-recurring items versus consensus analyst estimates for a loss of (-$0.02), a $0.10 per share beat. Revenues fell (-8%) year-over-year (YoY) to $3.86 billion, beating consensus analyst estimates for $3.82 billion. Old Navy sales fell (-13%) to $2.1 billion. Gap sales fell (-10%) to $881 million. Banana Republic sales rose 9% to $539 million and Athleta sales rose $1% to $344 million. The Company pulled its full-year 2022 outlook but remains cautiously optimistic as its saw an improvement in sales trends in July heading into August. Gap CFO Katrina O’Connell pointed out, “Coming off of peak inflation and the higher gas prices, particularly impacting the low-income consumer in June, we have seen an improvement in sales trends in July and into August, consistent with many other retailers. Comparable sales were down 10%, a sequential improvement from the negative 14% comp reported in the first quarter, which was negatively impacted by the lapping of stimulus in the prior year.”

Here’s What the Charts are Saying

Using the rifle charts on the weekly and daily time frames provides a precision view of the landscape for GPS stock. The weekly rifle chart peaked near the $11.93 Fibonacci (fib) level. Shares triggered a market structure high (MSH) overlapping with the weekly market structure low (MSL) buy trigger at $9.67. The weekly breakdown is forming with a falling 5-period moving average (MA) resistance at $9.32 crossing the 15-period MA at $9.36. The daily rifle chart breakdown has a falling 5-period MA resistance at $9.04 followed by the falling 15-period MA resistance at $9.30. The daily lower Bollinger Bands (BBs) sit at $8.40. The daily stochastic has a mini inverse pup falling towards the 20-band. Attractive pullback levels sit at the $7.79 fib, $7.49, $7.08 fib, $6.60, and the $6.24 fib.

Turnaround Strategy

The Company has four popular private label brands including The Gap, Old Navy, Banana Republic, and Athleta. Old Navy is the number two brand in the apparel market. CFO O’Connell laid out the turnaround strategy of reducing inventory through the second half of the year, rebalancing its assortment of products to better meet changing customer preferences, cutting overhead costs, reevaluating its marketing and technology investments and fortifying the balance sheet. The Company also plans to open 30 to 40 Athleta stores, 20 to 30 Old Navy stores and close nearly 50 Gap and Banana Republic stores.

Setting the Bar Low

The Company has set very low expectations so that any good news should be magnified. The announcement of a new CEO should boost share prices depending on the caliber and pedigree of the appointment. There is always the looming possibility of a spin-off of its Old Navy brand into a separate listing to bolster shareholder value. Seasonality also comes into play as retail stocks tend to rise ahead of the holiday shopping season.