Clothing retailer, The Gap (GPS, Financial) hurt us the most during the quarter, slashing 316 basis points from the Fund’s return. (One basis point is 1/100th of one percent.) During the quarter, its stock fell an astonishing 59.7% from $17.68 to $7.04.* Prior to the coronavirus outbreak, Gap made steady progress on its turnaround, canceling the spin-off of Old Navy, appointing Sonia Syngal as the new chief executive and slowing the decline in comparable store sales. However, shares plummeted when the pandemic forced the temporary closure of all its stores in North America. The stock fell further after management cut the company’s cash dividend and suspended share repurchases to strengthen the company’s balance sheet.
A little over a year ago, Gap traded around $30 a share, and it dropped to $5.50 a share during the first few days of April, so it’s trading at only 18% of its former value for a drop of 82%. Gap’s book value is $8.94, so it’s trading at only 62% of its book value. Even more astonishing is that Gap has $1.65 billion dollars in cash plus $316 million in receivables for a total of $1.97 billion. Since there are 371 million shares outstanding, that translates into $5.31 per share in cash and receivables. At a stock price of $5.50, it’s basically selling for the amount of cash and receivables on the balance sheet. At some point after the pandemic is over and the stores are open again, the stock should make a strong comeback.
From Jerome Dodson (Trades, Portfolio)'s Parnassus Endeavor Fund (Trades, Portfolio) first-quarter 2020 shareholder commentary.
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