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Gap - Should Investors Buy in after 120% Steady Advance in Share Price?

September 12, 2012 | About:
Gap Inc. (GPS) is the leading specialty apparel company. It is operating under the Gap, Old Navy, Banana Republic, Piperlime and Athleta brands via more than 3,200 company-owned and franchise stores globally. The company purchases from more than 1,000 vendors. No vendor accounted for more than 4 percent of total fiscal 2011 purchases. In terms of production, around 98% of all units were produced outside the U.S., and around 26 percent of our merchandise units were produced in China. It is always good thing to see that the company diversifies its purchases’ sources.

Profitability

In the past 10 years, GPS sales have been basically flat, fluctuating in the range of $14 billion to $16 billion. It has consistently generated positive operating cash flow and free cash flow during that period. The company has been profitable at the same time. The positive note is that GPS has paid increasing dividend over years. However, the fluctuation in the range of earnings and the increasing dividend would mean that the payout ratio is in the increasing trend. In 2003 it was 16.4% and now it is 28.8%.

USD million 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Revenue 14,455 15,854 16,267 16,023 15,943 15,763 14,526 14,197 14,664 14,549
NI 477 1,030 1,150 1,113 778 833 967 1,102 1,204 833
Div/share 0.09 0.09 0.11 0.18 0.32 0.32 0.34 0.34 0.4 0.45
OCF 1,238 2,171 1,620 1,551 1,250 2,081 1,412 1,928 1,744 1,363
FCF 935 1,899 1,178 951 678 1,399 981 1,594 1,187 815


Over the last five years, it seems that GPS has been focusing on opening franchising stores and reducing gradually the number of company operated stores. In addition, the comparable sales have decreased infour out of five years.

1741068412.jpg



(The year in the chart starts from 2011 to 2007, left to right.)

It is worth noting GPS’s contractual obligations, which amount to more than $3.8 billion in less than a year since January 2012 and more than $2.1 billion in the next one to three years.

In the past 52 weeks, GPS has experienced more than 121% gain in its share price. It advanced from $16.3 to $36 per share. Currently, GPS is trading at 20x earnings, 6x its book value and 10x its cash flow.

1223935551.jpg

Insider trades: Since the end of July this year, the executive vice president, CIO and president of GAP North America, general counsel and CFO has kept selling out their shares in the company, with the combined sale value of nearly $20 million.

My takes: Personally I would not interested in buying GPS share at this price because of several reasons:

  • Insiders have been selling large amountd
  • Valuation is considerably higher that its historical valuation (historical average P/E was 13.9x and P/B was 3x)
  • High contractual obligations with short-term due

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.1/5 (7 votes)

Comments

jaumepared
Jaumepared premium member - 1 year ago
It is a mystifying company. One thing they do very well is manage their cash flow. There has been periodic speculation of going private. The current rally may support that thesis. Never underestimate these folks. They are smart and run the company well. Though they aren't growing their top line, they are defending their brands and have some awesome strengths.

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