A reader, Joe M., wrote me asking about American retailer The Gap (GPS). With the stock price beaten down from the mid-$40s to the low-$30s over the last year, and local stores filled with back to school shoppers, Joe thought it might be an interesting idea.
In the interest of perfect disclosure, I must say that I have never much cared for retail myself. Investments in distressed retailers can sometimes work out spectacularly, but there is so much faddishness and uncertainty about what consumers will find attractive, that I have a hard time making confident calls in the sector.
That said, precisely because big retailers like The Gap lay claim to real estate locations that people habitually go, there is some underlying, inherent stability to these businesses. When the market is paying too much attention to the fads and too little attention to the stability, it seems likely that some good opportunities may arise.
The Gap’s biggest growth engine for the last decade has been Asia. If the Shanghai market is any indication, The Gap may not be able to enjoy as robust of a growth rate in Asia as it has in the past, and this may open its stock up to increased downside price risk. Looking at the valuation, however, over time, profits are very steady and revenue growth is pretty easy to model as well. Most (84%) of The Gap’s business is in the U.S., so if U.S. wage growth increases and people begin opening up their pocketbooks a bit more, this firm stands to benefit.
The new IOI Tear Sheet can be found by logging into IOI Tools. All Tear Sheets are in the Reading List area or you can just click the “Long Call on The Gap” image on the home page.