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Economic Moat




Athleisure and E-Commerce Lifted No-Moat Gap to an Operating Profit in Q2; Shares Undervalued

David Swartz Equity Analyst

Analyst Note

| David Swartz |

No-moat Gap’s results in the second quarter of 2020 were adversely affected by pandemic-related shutdowns, but strong 95% growth in e-commerce made up for some of the 48% drop in physical store sales. Thus, Gap, after a colossal GAAP operating loss of $1.2 billion in the first quarter, posted an unexpected operating profit of $73 million (2.2% of sales) in the second as its sales decline of 18% was better than our forecast of a 28% drop. We do not plan to make any significant change to our fair value estimate of $20.50 per share on Gap and view it as undervalued. While Gap continues to have significant problems, its pre-pandemic free cash flow generation was considerable, and its Old Navy and Athleta brands align well with current apparel trends.

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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 more than 3,200 stores in North America, Europe, and Asia and franchises nearly 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 Jul 31, 2020
Fiscal Year End Feb 1, 2021
Stock Type Cyclical
Employees 129,000