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Higher Expenses Overshadowed No-Moat Gap’s Sales Improvement in Q3; Shares Overvalued

David Swartz Equity Analyst

Analyst Note

| David Swartz |

No-moat Gap’s Old Navy and Athleta led the company to flat year-over-year sales in the third quarter of 2020, a marked improvement from the large declines of the previous two quarters and better than our forecast of a 7% drop. An 8% increase in operating expenses, though, resulted in an operating margin of just 4.4%, 10 basis points below our forecast. Gap reported higher expenses from store closings, safety measures related to the pandemic, and increased marketing to support its brands. Moreover, higher shipping costs are expected to impact the fourth quarter. Gap’s shares, which have risen steadily over the past few months, dropped about 11% in post-market trading. We do not expect any significant change to our $20.50 per share fair value estimate on Gap and judge it to be overpriced.

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Company Profile

Business Description

Gap retails apparel, accessories, and personal-care products under the Gap, Old Navy, Banana Republic, Athleta, Hill City, Janie and Jack, and Intermix brands. Old Navy generates nearly half of Gap’s sales. The firm also operates e-commerce sites, outlet stores, and specialty stores under various Gap names. Gap operates about 3,000 stores in North America, Europe, and Asia and franchises about 600 stores in Asia, Europe, Latin America, and other regions. Gap was founded in 1969 and is based in San Francisco.

Two Folsom Street
San Francisco, CA, 94105
T +1 415 427-0100
Sector Consumer Cyclical
Industry Apparel Retail
Most Recent Earnings Oct 31, 2020
Fiscal Year End Feb 1, 2021
Stock Type Cyclical
Employees 129,000