Gap Inc. (GPS, Financial) 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%.
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.
(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.
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:
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.
(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.
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
