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Dodge & Cox Upgrades Its Gap Wardrobe

Traditional value firm increases stake in restructured retail company

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Mar 15, 2022
Summary
  • The company has restructured its business over the past two years.
  • Dodge & Cox upped its holding by 56.72%.
  • The retailer disclosed its quarterly financial results earlier this month and issued guidance for 2022.
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Investment firm Dodge & Cox disclosed last week it upped its stake in Gap Inc. (

GPS, Financial) by 56.72%.

Founded in 1930, the San Francisco-based investment firm takes a classic long-term value approach, steering clear of popular companies that trade at premium prices. Rather, its managers prefer to conduct in-depth research into companies trading at low valuations that have promising earnings and cash flow growth prospects.

Having whittled down the stake before adding to it again in the fourth quarter of 2021, GuruFocus Real-Time Picks, a Premium feature based on 13D filings, show the firm invested in 13.9 million shares of the retail company on Feb. 28, which had an impact of 0.13% on the equity portfolio. The stock traded for an average price of $14.55 per share on the day of the transaction.

Dodge & Cox now holds 38.4 million shares total, accounting for 0.35% of the equity portfolio. GuruFocus estimates the firm has lost 25.55% on the investment since establishing it in the fourth quarter of 2018.

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Headquartered in San Francisco, the retail company, which has the Gap, Old Navy, Banana Republic and Athleta brands under its umbrella, has a $5.32 billion market cap; its shares were trading around $14.26 on Tuesday with a price-earnings ratio of 21.72, a price-book ratio of 1.94 and a price-sales ratio of 0.33.

The GF Value Line suggests the stock is modestly undervalued currently based on its historical ratios, past performance and future earnings projections.

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The retailer released its fourth-quarter and full-year 2021 financial results on March 3. For the three months ended Jan. 29, it posted an adjusted earnings loss of 2 cents per share on $4.5 billion in revenue, which was up 2% from the prior-year quarter but down 3% compared to 2019. Comparable sales, however, were up 3% on both a year-over-year basis and versus 2019.

For the full year, Gap recorded adjusted earnings of $1.44 per share on $16.7 billion in revenue, which increased 21% from 2020 and grew 2% from 2019. Comparable sales were up 6% year over year and up 8% versus two years ago.

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In a statement, CEO Sonia Syngal noted the company’s “core business is strong” and is “poised for balanced growth” across its four brands after restructuring its business over the past two years.

“As our teams address near-term disruption from the acute headwinds that muted our fourth quarter performance, we are confident in our ability to execute against our long-term strategy, capitalizing on our investments in demand-generation, customer loyalty and artificial intelligence to accelerate profitable growth,” she said.

Looking ahead, the retailer issued guidance for 2022. Gap expects diluted earnings per share to range from $1.95 to $2.15. It is also projecting revenue growth to be in the low single digits for the full year.

At the end of February, the company also announced it plans to increase the annual dividend by 25% to 60 cents per share.

GuruFocus rated Gap’s financial strength 5 out of 10. In addition to insufficient interest coverage, the Altman Z-Score of 1.85 indicates the company is under some pressure.

The company’s profitability fared much better, scoring an 8 out of 10 rating on the back of margins and returns that have mixed performances versus competitors. Gap is also supported by a high Piotroski F-Score of 8 out of 9, meaning operations are healthy, and a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Gap, Dodge & Cox has the largest stake with 10.35% of its outstanding shares. The

Parnassus Endeavor Fund (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, David Tepper (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and John Hussman (Trades, Portfolio) also have positions in the stock.

Portfolio composition and performance

Dodge & Cox’s $161.45 billion 13F equity portfolio was composed of 197 stocks as of the end of the fourth quarter of 2021. The financial services sector had the largest representation at 24.33%, followed by the technology (18.84%) and health care (17.33%) spaces. Consumer cyclical stocks made up only 3.67% of the holdings.

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Other retail companies the firm held as of Dec. 31 included Alibaba Group Holding Co. Ltd. (

BABA, Financial), JD.com Inc. (JD, Financial), Qurate Retail Inc. (QRTEA, Financial), The Home Depot Inc. (HD, Financial), Amazon.com Inc. (AMZN, Financial), eBay Inc. (EBAY, Financial), Genuine Parts Co. (GPC, Financial), Lowe’s Companies Inc. (LOW, Financial) and Vipshop Holdings Ltd. (VIPS, Financial).

GuruFocus data shows Dodge & Cox’s Stock Fund returned 31.73% in 2021, outperforming the S&P 500’s 28.7% return.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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