Gap (GPS, Financial) is one of the most iconic American brands and still has a solid economic moat. The company has been downsizing and closing stores, making room for cash to be deployed into higher-profit channels like ecommerce.
It ended the first quarter with 3,794 company-operated and franchise store locations with almost 38 million square feet of retail space covering well-known brands like Banana Republic, Old Navy, Athleta, Gap and Gap Kids.
With a 4% dividend payment and the stock trading at 10x earnings, Gap looks attractive for a patient investor. If successful, the company could double its market value by the end of the decade as it starts opening smaller stores and focusing on core strengths.
By the numbers
The company is highly profitable with excellent gross margins but has shown little growth outside of the dividend payment in the last decade. Thankfully for shareholders, it has bought back more than 50% of the outstanding stock, boosting earnings per share and potential long-term value. In fact, Gap has repurchased $3.2 billion of common stock since 2012, unfortunately at much higher prices.
2007
- Revenue: $15.9 billion.
- Income: $778 million.
- Dividend: 32 cents.
- Book value: 6.36.
- Stock price: $18.31.
- Shares out: 836 million.
2016
- Revenue: $15.8 billion.
- Income: $920 million.
- Dividend: 92 cents.
- Book value: 6.41.
- Stock price: $23.06.
- Shares out: 413 million.
Going forward
Earlier this month, Gap tapped Sonia Syngal as its global president for Old Navy, returning to the subsidiary after heading Gap’s global supply chain and product operations. The decision came after Stefan Larsson left to become the CEO of Ralph Lauren (RL, Financial). Larsson turned Old Navy into Gap’s No. 1 brand; it presently accounts for 42% of the company revenue. Gap itself only makes up 36% of total sales. The performance of Syngal and Old Navy will be key to the company’s future.
Guru ownership
While there are a number of big money managers in the stock – e.g., Ray Dalio (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) – the name that stands out is Edward Lampert and RBS Partners. Lampert added to his position in Gap last quarter, bringing his total position to 4.26 million.
RBS now owns $105 million worth of the leading apparel retailer, building the position as shares fell 40% over the last 12 months because of the weakness in Old Navy stores. This has led to a 15% short position in the stock. While overseeing billions and putting his own money to work in a big way, Lampert has clearly lost a step. Maybe he’s become too romantic about retail or just too entrenched, yet with Gap he’s been right before on the timing.
Price potential
Currently, the stock trades below the industry average P/E (25x) and its own five-year average (14x). A 15x on the same earnings would equate to a $35 price, not to mention continued share buybacks coupled with any real growth in earnings could produce even higher numbers by the end of the decade.
Lampert has just over 7% of the total investment portfolio in Gap. It’s prudent to have far less if you want to follow this guru and buy into Gap.
Disclosure: I do not own Gap.
