Gap (GAP)

Underperform
We aren’t fans of Gap. Its low returns on capital and plummeting sales suggest it struggles to generate demand and profits, a red flag. StockStory Analyst Team
Anthony Lee, Lead Equity Analyst
Max Juang, Equity Analyst

1. News

2. Summary

Underperform

Why We Think Gap Will Underperform

Operating under the Gap, Old Navy, Banana Republic, and Athleta brands, Gap (NYSE:GAP) is an apparel and accessories retailer selling casual clothing to men, women, and children.

  • Annual revenue declines of 1.4% over the last six years indicate problems with its market positioning
  • Underwhelming 7.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
  • Store expansion strategy seems risky considering the weak same-store sales performance at existing locations
Gap doesn’t satisfy our quality benchmarks. We see more attractive opportunities in the market.
StockStory Analyst Team

Why There Are Better Opportunities Than Gap

Gap is trading at $20.93 per share, or 8.9x forward P/E. This sure is a cheap multiple, but you get what you pay for.

Cheap stocks can look like a great deal at first glance, but they can be value traps. They often have less earnings power, meaning there is more reliance on a re-rating to generate good returns - an unlikely scenario for low-quality companies.

3. Gap (GAP) Research Report: Q1 CY2025 Update

Clothing and accessories retailer Gap (NYSE:GAP) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 2.2% year on year to $3.46 billion. Its GAAP profit of $0.51 per share was 13.2% above analysts’ consensus estimates.

Gap (GAP) Q1 CY2025 Highlights:

  • Revenue: $3.46 billion vs analyst estimates of $3.42 billion (2.2% year-on-year growth, 1.3% beat)
  • EPS (GAAP): $0.51 vs analyst estimates of $0.45 (13.2% beat)
  • Maintained previously provided fiscal 2025 guidance but added that "The below fiscal 2025 outlook does not reflect the potential effect of tariffs, which are currently 30% on most imports from China and 10% on most imports from other countries. If these tariff rates remain, they could result in a gross estimated incremental cost of approximately $250 million to $300 million."
  • Operating Margin: 7.5%, up from 6.1% in the same quarter last year
  • Free Cash Flow was -$223 million compared to -$63 million in the same quarter last year
  • Locations: 3,496 at quarter end, down from 3,571 in the same quarter last year
  • Same-Store Sales rose 2% year on year, in line with the same quarter last year
  • Market Capitalization: $10.64 billion

Company Overview

Operating under the Gap, Old Navy, Banana Republic, and Athleta brands, Gap (NYSE:GAP) is an apparel and accessories retailer selling casual clothing to men, women, and children.

The core customer is therefore broad, and the aesthetic is a mix of timeless and trendy Americana. For example, Gap has always been a good place to find a classic pair of khakis for work. It can also be a destination for a jacket that is a bit more trendy and fashion-forward. Prices tend to be towards the affordable end of the spectrum, with frequent sales further enticing customers.

Old Navy features the lowest prices and is the most casual in style. Banana Republic is the most upscale and this is reflected in its prices. The Gap brand sits in the middle regarding price and style. Athleta, acquired in 2008, offers women’s athleisure clothing such as yoga pants and sports bras.

Gap’s stores, regardless of brand, are roughly 5,000 square feet and located in malls or shopping centers. They are organized in a similar manner to other clothing retailers, with sections for men, women, and children as well as centralized displays for promoted or seasonal items. Gap has an e-commerce presence for each of its brands that gives customers various shopping options.

4. Apparel Retailer

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Retailers offering casual yet trendy apparel for men, women, and children include H&M (OM:HMB), Inditex (BME:ITX) which owns Zara, Abercrombie & Fitch (NYSE:ANF), and American Eagle Outfitters (NYSE:AEO).

5. Sales Growth

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $15.16 billion in revenue over the past 12 months, Gap is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. To expand meaningfully, Gap likely needs to tweak its prices or enter new markets.

As you can see below, Gap’s demand was weak over the last six years (we compare to 2019 to normalize for COVID-19 impacts). Its sales fell by 1.4% annually despite opening new stores and expanding its reach.

Gap Quarterly Revenue

This quarter, Gap reported modest year-on-year revenue growth of 2.2% but beat Wall Street’s estimates by 1.3%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. While this projection implies its newer products will fuel better top-line performance, it is still below the sector average.

6. Store Performance

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Gap operated 3,496 locations in the latest quarter. It has opened new stores quickly over the last two years, averaging 2.4% annual growth, faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Gap Operating Locations

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

Gap’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat. Gap should consider improving its foot traffic and efficiency before expanding its store base.

Gap Same-Store Sales Growth

In the latest quarter, Gap’s same-store sales rose 2% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

7. Gross Margin & Pricing Power

Gap has good unit economics for a retailer, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see below, it averaged an impressive 40.6% gross margin over the last two years. Said differently, Gap paid its suppliers $59.43 for every $100 in revenue. Gap Trailing 12-Month Gross Margin

Gap’s gross profit margin came in at 41.8% this quarter, in line with the same quarter last year and exceeding analysts’ estimates by 0.7%. Zooming out, Gap’s full-year margin has been trending up over the past 12 months, increasing by 1.7 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold.

8. Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

Gap was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.4% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.

On the plus side, Gap’s operating margin rose by 2.5 percentage points over the last year.

Gap Trailing 12-Month Operating Margin (GAAP)

This quarter, Gap generated an operating margin profit margin of 7.5%, up 1.5 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

9. Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Gap’s full-year EPS grew at a remarkable 28.3% compounded annual growth rate over the last five years, better than the broader consumer retail sector.

Gap Trailing 12-Month EPS (Non-GAAP)

In Q1, Gap reported EPS at $0.51, up from $0.42 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Gap’s full-year EPS of $2.31 to grow 1.6%.

10. Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Gap has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.7% over the last two years, quite impressive for a consumer retail business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Gap’s margin dropped by 1.9 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.

Gap Trailing 12-Month Free Cash Flow Margin

Gap burned through $223 million of cash in Q1, equivalent to a negative 6.4% margin. The company’s cash burn increased from $63 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

11. Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Gap historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.1%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

12. Balance Sheet Assessment

Gap reported $2.22 billion of cash and $5.49 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

Gap Net Debt Position

With $1.66 billion of EBITDA over the last 12 months, we view Gap’s 2.0× net-debt-to-EBITDA ratio as safe. We also see its $7 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

13. Key Takeaways from Gap’s Q1 Results

We liked that Gap beat on revenue and EPS. On a headline basis, the company maintained previously-provided full-year guidance but added that "The below fiscal 2025 outlook does not reflect the potential effect of tariffs, which are currently 30% on most imports from China and 10% on most imports from other countries. If these tariff rates remain, they could result in a gross estimated incremental cost of approximately $250 million to $300 million." This is spooking the market, and the stock traded down 16.5% to $23.34 immediately after reporting.

14. Is Now The Time To Buy Gap?

Updated: June 14, 2025 at 10:24 PM EDT

When considering an investment in Gap, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Gap isn’t a terrible business, but it isn’t one of our picks. For starters, its revenue has declined over the last six years. And while its new store openings show it’s growing its brand, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its poor same-store sales performance has been a headwind.

Gap’s P/E ratio based on the next 12 months is 8.9x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $26.68 on the company (compared to the current share price of $20.93).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.