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.