The Gap (NYSE:GPS): Risky Story With Upside

Sometimes the best stories are the ones you don't see coming. For instance, consider the story that shows it might be a good idea to make an investment in a mall-facing retailer, which as we've seen from several other mall-facing retailers that are currently floundering—like American Eagle Outfitters (NYSE:AEO) and the Children's Place (NASDAQ:PLCE)—might not be the greatest of plans. The retailer in question is the Gap (NYSE:GPS), and this is one physical retailer who isn't going to take status quo for good enough.

This Story Looks Distressingly Familiar...

Taking a look at the one year chart for the Gap looks like another story that we only recently heard when we talked about Macy's. Yesterday. The stock price spent most of June 2019 through February 2020 locked in a tight range between $15 and $20, and any deviation away from about $17 a share was swatted back down—or up—within a day or two. Then along came February into March, and The Massive Indiscriminate Coronavirus Sales Event hit the Gap like a face-full of iron skillet.

The stock lost around two-thirds of its value in about six weeks, dropping from that comfortable $17 range to briefly see a new 52-week low of $5.26. If that sounds almost exactly like what happened to Macy's (NYSE:M), then you understand why there's cause for alarm.

Yet just like Macy's, it's also staged a comeback off those lows. It hasn't climbed back up to that $17 range it was trading in six months ago, but it's puttering along right around the $12 range. Back in March, the company even asserted that its dividend plans would go unaffected, a move that current—and potential future—investors likely cheered.

The Hero's Journey Arc Begins

So why even talk about the Gap at all, you might wonder. It's another example of a mall-facing retail stock that's about to suffer the fate of the velociraptor in the tar pit, right? Well, not so fast...much like Macy's, the Gap isn't planning to go quietly into the tar and drown like some bird-brained lizard. No, the Gap has new plans to draw interest in its brand and give itself a leg up now that it's actually allowed by government mandate to re-open its stores.

The first bit of news—and one that's brought some steady gains to Gap pre-market trading for today—is that Kanye West is poised to bring his Yeezy brand of clothing to Gap stores. That doesn't include everything in the Yeezy line—the sneakers, at last report, are out of the picture—but the adult and kids' clothing is fair game. The clothes are set to hit shelves sometime in 2021, so anyone who wants some Yeezy clothing might do well to start shopping at the Gap now so as to ensure the company will be around in 2021 to offer the Yeezy gear.

West himself is reportedly in line for a potential equity stake if the clothing sells well, and given that West was actually a former Gap employee—he worked at a Chicago branch as a teenager—there's a note of authenticity there that should go well with marketing efforts. Nothing like a former line employee to know what customers want, after all.

This move works wonderfully for both sides; the Gap gets a way to remain relevant with shoppers, and Yeezy gets its product in Gap's lineup of 1,100 different stores, a point which undoubtedly will appeal to all concerned.

Finished Before It Can Even Start?

Adding Yeezy should be a smart move for the Gap, but it's far from the only tool in the box. The Gap is one of several retailers getting in on the secondhand clothing market with a connection to thredUP. It's also recently made some positive waves by joining in the fight to get personal protective equipment (PPE) to hospitals and healthcare providers.

However, all isn't well for the Gap, as ambitious as their hero's journey arc may be. There's already at least one civil suit in the making over unpaid rent, and as a mall tenant on a grand scale, there may well be more to come. The Gap is hardly in a unique position on that one, but it's still likely to cause it some problems going forward.

The ultimate question here is: can the Gap survive the rest of 2020 to take advantage of the holiday shopping season that's poised to hit in just over four months and the arrival of its Yeezy gear? If it can clear its way through this rough patch, it's got enough firepower on its side to make a significant comeback. It's got loads of goodwill on its balance sheet thanks to the PPE help, it's taking advantage of trends like Yeezy and secondhand shopping, and it might have the juice it needs to become a stop on customers' shopping lists once more.

...if it can get through the next four months, that is....