The S&P 500 LargeCap index is down 2.14% year-to-date (YTD) and 5% from its high of 2,134.72 reached in May of this year. In contrast, the Consumer Discretionary Index is up 7.9% YTD. But even with the sector outperforming the main index, there are a few stocks quoting near 52-week lows.
Gap Inc. (GPS)
Performance
52-week high($43.9) / 52-week low($26.5) / Current Price ($27.42).
In the quarter ending July, revenue was down from $3,981 (m) to $3,898 (m) and EPS from $0.74 to $0.53 compared to last year. The reported revenue for the last year was $16,435 (m) and EPS was $2.76. Revenue for the first six months of the current fiscal year is $7,555 (m) and EPS is $1.09. The consensus EPS for the current fiscal year is $2.74. At the current price, P/E of the stock is 10.4X compared to 25.1X for the Apparel Stores industry. The debt-equity ratio of the company is at 0.5 – not a cause of concern.
Reason for decline
The retailer is facing stiff competition from fast-fashion retailers like H&M, Zara, Uniqlo, and Inditex. The operating margins of the Gap are 12% compared to 18% of H&M and 19% of Inditex. A strong dollar is hurting the overseas sales and recent labour problems at West Coast ports have resulted in inventory delays.
The retailer received a setback with the departure of its Old Navy president, Stefan Larsson, who is moving to take over as CEO of Ralph Lauren. He was instrumental in the growth at Old Navy by introducing attractive fashion styles at affordable prices, which were appreciated by its young customers who kept coming back for more. The Old Navy brand has performed well based on same store results compared to the company’s other brands – Gap and Banana Republic – in the last six quarters. However, this momentum could slow down with the change in leadership.
Actions by Management
The company is addressing the problem of uneven sales in the recent past by taking various corrective measures. New presidents have been appointed for the Gap and Banana Republic brands to replicate the success of Old Navy.
The retailer is rightsizing its specialty stores and has announced it will close a quarter of the shops. They are rebalancing their portfolio with increasing presence in outlet stores, franchise stores, and e-commerce. Continuing with its cost-cutting measures, 250 corporate job cuts have also been announced.
Even though growth might be sluggish in the near term, it is expected to pick up subsequently due to efforts by management to strengthen the supply chain, and implement seamless inventory and omni-channel initiatives.
They are using their cash smartly by leveraging their iconic brands globally, initiating stock buybacks and distributing dividends to shareholders. The stock has returned a CAGR of 19% over the last five years.
There are a couple of other interesting retail stocks like Michael Kors Holdings (KORS) and Coach Inc. (COH) which are trading near their 52-week lows. We’ll take a look at the reasons behind their performance in the coming weeks. Always be sure to conduct thorough analysis before making any investment decision and invest wisely with a long term view.