Apparel retailer Gap Stores (NYSE: GPS) shares have been seeing a resurgence as lockdown mandates get lifted and malls resume consumer traffic. As the bench S&P 500 index (NYSEARCA: SPY) grinds recovers off March 2020 lows towards new all-time highs, money managers are desperately searching for laggards for more upside. As part of the beaten-down pandemic epicenter stock groups, retail apparel, Gap is one of the few brick and mortar retail stocks worth stepping into at opportunistic price levels. This means not chasing but methodically positioning at strong price support levels.
Q1 FY 2020 Earnings Release
On June 4, 2020, Gap released its first-quarter fiscal 2020 results for the quarter ending April 2020. The Company reported a loss of (-$2.51) per share versus consensus analyst estimates for a loss of (-$0.60) per share. Revenues fell (-43.1%) year-over-year (YoY) to $2.11 billion falling short of consensus estimates of $2.35 billion. The Company saw online sales grow 40% in April and 100% in May YoY as most stores were closed. With $4 billion in annual pre-COVID revenues, Gap is the second largest apparel e-commerce site in the U.S. The Company pivoted to online and social media with Banana Republic styling sessions, virtual concierge and one-on-one interactions with store associates.
Gap took non-cash impairment charges of (-$484 million) for store and leasing assets and (-$235 million) for inventory. Operating losses were (-$1.2 billion) including impairment charges. The Company plans to cut annual capex by half to $300 million for 2020. Over 70% of stores are located in stressed outlet and off-mall real estate locations which Gap sees as a benefit for customers seeking to maintain social distancing. Shares managed to absorb initially selling and proceeded to grind higher.
On June 26, 2020, Gap announced a partnership deal with musician and entrepreneur Kanye West’s fashion brand YEEZY. A YEEZY Gap line of clothing is slated for release in 2021. West is sole owner of the YEEZY brand estimated to be worth close to $2.9 billion. The partnership would result in royalty and potential equity payouts based on sales milestones. YEEZY also has footwear deals with Adidas. Shares immediately surged on the news as adding YEEZY is believed to be introducing the Gap brand to a younger cultural demographic.
RBC capital upgraded shares of GPS on July 15, 2020, with an outperform rating an $18 per share price target under secular tailwinds at Old Navy and Athletica post-COVID-19 in addition to the 1H 2021 launch of YEEZY Gap. Famed hedge fund investor Dan Loeb’s Third Point disclosed a new 3 million share position in GPS in their Q2 2020 13F filing disclosures. Earnings are due out post-market August 27, 2020. As a rule of thumb, if shares rally into the report, then wait until after the release to avoid a sell-the-news type reaction. Retailers Walmart (NYSE: WMT) and Kohls (NYSE: KSS) are examples of earnings beats followed by a sell the news reaction in the shares. Granted, Kohl’s also guided down forecasts setting the bar low for itself.
GPS Opportunistic Price Levels
Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for GPS stock. The monthly rifle chart triggered a market structure low (MSL) buy above $10.80 and weekly trigger above $9.39. The monthly rifle chart completed its channel tightening as stochastic crossed up through the 20-band and the 15-period moving average (MA) hit at the $14.83 Fibonacci (fib) level. Usually a move from the 5-period MA to 15-period MA on a downtrend channel tightening sets ups a reversion pullback. The weekly stochastic has grinded higher with multiple bullish mini pup formations and is nearing the overbought 90-band. The slow grind leaves the weekly 5-period MA support at $14.02 with upper Bollinger Bands (BBs) at $17.50. As cautioned earlier, if GPS continues to grind towards those upper BBs into earnings, then its best not to chase but wait until after the earnings release. If a sell the news reaction triggers, then opportunistic pullback price levels may present themselves at the $13.55 fib, $12.50 sticky 2.50s range and the $11.73 fib monthly 15-period MA and fib. It pays to be patient and not trip over the fear of missing out (FOMO) that algorithms try to induce. Scaling in pyramid style works best. While the Company has decided against spinning off Old Navy, this is always a potential upside catalyst that management could reintroduce.
The Gap is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
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