The Gap, Inc. (GPS) is a specialty apparel company offering clothing, accessories, and personal care products for women, men, and children. The global and omnichannel retailer markets its offerings under the Old Navy, Gap, Banana Republic, and Athleta brands.

Despite losing 17.7% year-to-date to close the last trading session at $15.15, the stock is currently trading above its 200-day moving average of $11.30, indicating potential downside risks.

However, with the odds of the Fed ultimately increasing benchmark interest rates significantly above expectation increasing with every release of economic data, an end to current economic uncertainties doesn’t seem to be in sight.

Hence, let’s closely examine if the fundamentals make GPS worthy of investment.

Weak Financials

For the fiscal 2022 third quarter ended October 29, the non-GAAP gross profit of GPS decreased 5.4% year-over-year to $1.56 billion. The company’s gross margin for the period was 38.7%, lower than 41.9% during the previous-year quarter. Its operating income also decreased 8.2% year-over-year to $156 million.

GPS’s total assets stood at $12 billion as of October 29, 2022, compared to $12.78 billion as of October 30, 2021.

Bleak Analyst Estimates

Analysts expect GPS’ revenue for the fiscal year ending January 2023 to decrease 5.6% year-over-year to $15.73 billion. The company is expected to report a loss of $0.13 per share during the same period, compared to an EPS of $1.44 during the previous fiscal.

Inefficient Asset Utilization by Management

GPS’ trailing 12-month return on common equity of 2.05% is 84.1% lower than the industry average of 12.92%. The company’s trailing 12-month net income margin of 0.35% is remarkably lower than the industry average of 5.05%, while its trailing 12-month return on total assets of 0.46% is 89.5% lower than the industry average of 4.36%.

Unenviable Track Record

Over the past three years, GPS’ revenue has shrunk at a 0.9% CAGR, while its EBITDA has decreased at a 33.3% CAGR. The company’s net income also contracted at a 59.2% CAGR during the same period.

POWR Ratings Reflect Fundamental Weakness

GPS’ overall D rating translates to a Sell in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Our proprietary rating system also evaluates each stock based on eight distinct categories. GPS has a grade D for stability owing to frequent changes at its helm. After parting ways with Art Peck in late 2019 and Sonia Syngal in July this year, the company is yet to appoint a new permanent CEO.

In addition, GPS has a D grade for Growth, in sync with its weak historical growth rates and bleak analyst estimates.

Unsurprisingly, GPS is ranked #59 of 66 stocks in the Fashion & Luxury industry.

Click here to see additional POWR Ratings for Value, Momentum, Sentiment, and Quality for GPS.

Bottom Line

Given that the Fed might go further than expected with its rate hikes, increasing borrowing costs and reducing discretionary expenditure could put further pressure on the company’s already compressed margins. The near-term outlook doesn’t seem encouraging for GPS.

Moreover, the company has an additional threat from fast fashion, which might further affect its profitability.

Given GPS’ weak financials, low profitability, and underwhelming growth prospects, it could be wise to avoid this apparel stock for now.

How Does The Gap, Inc. (GPS) Stack up Against Its Peers?

GPS has been rated D, equating to a Strong Sell. You may check out these other stocks within the Fashion & Luxury industry with an A (Strong Buy) or B (Buy) rating: J. Jill, Inc. (JILL), Hugo Boss AG (BOSSY), and Chico's FAS, Inc. (CHS).

GPS shares were trading at $14.40 per share on Tuesday afternoon, down $0.75 (-4.95%). Year-to-date, GPS has declined -14.01%, versus a -16.51% rise in the benchmark S&P 500 index during the same period.

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.

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