#5 - Gap (NYSE:GPS)
Gap (NYSE:GPS) is an iconic name with a big problem. Gap made its name as a favorite of mall rats, a demographic that no longer exists. In the world of e-commerce, Gap is just another name. And with many consumers likely to hold off on discretionary spending, Gap faces perhaps a larger crisis than most retailers. They not only have to increase sales, but they also have to do so by bringing those consumers into malls.
What is going to make that crisis even more challenging is that it will have to do it with a very low margin for error. The company can absorb just a -9% revenue decline before its operating income will fall to zero (i.e. break-even). If it takes until the fourth quarter for demand to come close to bouncing back (and that’s a big if), Gap may be on pace to lose $150 million or more in cash. At this time, it has enough cash on hand to absorb that, but if demand falls to zero, that runway becomes much shorter.
GPS stock is down over 50% for the year
About GAP
The Gap, Inc operates as an apparel retail company. The company offers apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. Its products include adult apparel and accessories; and fitness and lifestyle products for use in yoga, training, sports, travel, and everyday activities for women and girls.
Read More - Current Price
- $24.45
- Consensus Rating
- Hold
- Ratings Breakdown
- 8 Buy Ratings, 7 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $25.98 (6.3% Upside)
The outlook for retail for the rest of 2020 comes down to having a consumer that is willing to spend. For many retailers, a slow but steady recovery may be enough to protect them from having to file for bankruptcy protection. But, there is growing uncertainty about both the speed and the consistency of the recovery.
On the one hand, recent personal savings numbers show that consumers will have the cash to spend if they want. But therein lies the challenge. U.S. consumer spending was down 13.6% in March. And this was despite the PCE Price Index barely rising. The reality for many Americans is that there is very limited room for discretionary spending.
Plus, while the rate of new jobless claims may be declining, that doesn’t mean we won’t see the overall count go higher. With 40 million Americans now filing for and/or receiving unemployment, the idea of a “V-shaped” recovery is largely seen as a myth.
This is a paradox for retailers. There is a lot of money to be spent and it seems that there may not be an appetite to spend it, at least not in conventional brick-and-mortar locations. The five companies in this presentation do not have a strong e-commerce presence and don’t fit the traditional omnichannel model that is defining the future of retail. And for this reason, they may have staved off bankruptcy for now, but all of them face significant challenges to not be the next J.C. Penney or J.Crew.
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