Is it Time to Take 'The Gap'?

  • Established in 1969 - The Gap is a global American brand
  • Global sales in 50 countries gives great diversity - but means getting hurt by a strong USD
  • Share repurchase programme in 2014 of $1.3 billion
  • New share repurchase programme announced for 2015 of $1 billion - to be financed out of operational cash flow
  • Dividend increased to $0.92 (2.22% at current price)
  • 2015 to be another flat year but growth prospects going forward look good
  • This quality stock holds good long term returns

The Gap (NYSE: GPS) released it's Q4 results on the 26th Feb 2015. The strong USD got the better of the business, resulting in a flat year across the board for The Gap, despite growing sales by 2%.

The management team are not deviating from their core strategy which is to:

  1. Listen to the voice of the customer - understand their needs and desires
  2. Focus on making shopping easier
  3. Develop their own technology to compliment the physical stores
  4. Entering the high margin luxury market with Intermix

At STRIDE we estimate that the business is ready to start enjoying a growth rate of about 10%. However management are expecting 2015 to be another tough year with the strong US dollar (-6%) and problems with shipments through West Coast ports (-4%).  Whilst these two things are material we do not feel that these factors detract from the underlying story that this business is prudently financed and that its investment programme yields good growth. There is a hint of this growth potential in the business highlights where sales of Old Navy brand grew 11% during 2014.

Shareholder value creation

The Gap is looking to reward shareholders through a balanced strategy of share repurchase and dividends. We like the share repurchase given the discount to fair value that the shares are trading at. The share price has risen 8% since the previous year end close so this has driven incremental value to all shareholders. The 2% dividend yield is also attractive for investors wanting some income. This adds up to a 10% return over the year.

There is always a danger with share repurchases. Be cautious for management that spends shareholder cash to buy back into their own growth story. We encourage investors to keep a watchful eye for this.


STRIDE scores for the business are looking pretty good. For more info on how the scores work, take a look at the scores and ratings video.

The strength rating is 87 and we can see that the Z-score reflects the safety and relative strength of this business. Liquidity and solvency ratios are all fantastic and the business is prudently run with a great net working capital / net current asset position.


The timing rating shows that the business has traded up slightly but has been pretty flat.

The returns score is 80 and we can see that this is reflected in the Greenblatt rank / Magic Formula investing position. Returns across the business are good and steady:gap_ratios

The intrinsic value score of 32 is on the low side - True Book Value per share of $ 5.77. The business is clearly not a book value / intrinsic asset value play.

The dividend score is 48 - the dividend is stable, growing and affordable.

Earnings predictability is 81 - the business has continued to grow the revenue however the currency headwinds have impacted the gross and net profit marginally.gap_stride_scores

STRIDE Valuation

Our fair value comes in at ~$52. The business consistently trades in a band between our consider buy and fair value. The only exception to this was during 2000 to 2003 when the shares traded well above our consider sell indicator.  This is a business that seems unloved by the market even though it produces stable growing profits. As stated previously our forecast growth number is 10%. We will have to wait and see if the management team were just setting low expectations so that they can deliver a good news story during the year.  We consider the current price to be close to our required entry point of $40 - a 23% discount to our fair value.  This would give us a decent margin of safety. The consider sell price is dictated by our RISE factor - more on this in our detailed analysis video.gap_valuation

STRIDE Financials

Income statement show revenue growth has been consistent and growing as depicted below. As stated previously the currency headwinds have impacted the gross and net profit numbers marginally.gap_is

The balance sheet is stable and the company looks to distribute excess cash back to shareholders.gap_bs-1

The cash flow is stable and the company only retains as much cash as it needs to operate after returning a $1.3 billion to shareholders.gap_cf


Currently, The Gap is only on our watchlist due to our timing score. For more info on how the timing scores work, take a look at the scores and ratings video. At STRIDE our price alerting will send an email once a share moves through a price target. This is a quality business that has evolved with the digital age and is investing prudently for the future. We are watching the shares very closely to see a good entry point.

Topics: Valuation


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