Gap Stock Up 7% Today – Time to Buy GPS Stock?

The price of Gap stock is surging nearly 7% this morning in pre-market stock trading action following the release of the firm’s financial results covering the fourth quarter of the 2021 fiscal year as earnings guidance for 2022 was higher than the market expected.

For the three months ended on 29 January, Gap reported net sales of $4.5 billion resulting in a 3% decline compared to 2019 – before the pandemic. Online sales grew 44% compared to the same year and they accounted for 43% of the company’s top-line results. This top-line figure slightly exceeded the Street’s estimate.

The Gap and Banana Republic brands reported negative revenue growth of 11% and 13% respectively compared to 2019 while Athleta sales grew 52% compared to the same year.

Gross margins during the quarter experienced a 260 basis point decline compared to 2019 at 33.7% as the global supply chain crisis kept weighing on Gap’s top-line performance.

Meanwhile, on a GAAP basis, operating margins ended at 0.2% while non-GAAP operating margins stood at 0.4% resulting in a 550 basis point drop compared to the fourth quarter of 2019.

Diluted earnings per share for the quarter ended at $0.04. This loss was narrower than the $0.14 per share estimate that analysts had set forth for the period.

Finally, Gap estimates to report low single-digit revenue growth in 2022 compared to 2021 along with non-GAAP operating margins of up to 6.5% and diluted adjusted earnings per share ranging from $1.85 to $2.05. These forecasted earnings exceeded analysts’ predictions for the period by a relatively large margin.

The firm’s narrower than expected fourth-quarter loss and this above-expected earnings guidance for 2022 are possibly the reason why Gap stock is surging in pre-market action today.

What could be expected from this retail stock following the release of this quarterly report? In this article, I will be assessing the price action and fundamentals of GPS stock to outline plausible scenarios for the future.

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Gap Stock – Technical Analysis

Gap accumulates a 19.3% loss so far this year without including this morning’s uptick as the financial performance of the apparel company has kept suffering amid the ongoing global supply chain crisis.

In the previous quarter, Gap sales missed the market’s estimate by a long shot and that prompted a huge 24% decline in the stock price. Thus far, the stock has not recovered any of that lost territory.

As the chart above indicates, the price action has made multiple consecutive lower highs and lower lows and has formed what seems to be a falling wedge formation.

Even if this pre-market jump materializes during the live session, the price would still be confined within the boundaries of this pattern and, therefore, this event is not necessarily encouraging from a technical standpoint just yet.

Momentum indicators might be starting to signal that negative momentum is decelerating as both the Relative Strength Index (RSI) and the MACD have posted bullish divergences. However, unless the price breaks above the $19 level, the short-term outlook for Gap continues to be bearish.

Gap Stock – Fundamental Analysis

Gap’s revenues have been a bit volatile in the past few years while the pandemic prompted a strong decline in the firm’s top-line results as physical stores were shut down during lockdowns.

For 2022, the situation will not be too different as the management already stated that revenue growth will be in the low single digits.

Disruptions in the company’s supply chain amid the bottlenecks caused by the COVID-19 pandemic will probably play a huge role in shaping its financial performance during the coming quarters.

In 2021, Gap produced free cash flows of $115 million while its long-term debt stood at $1.48 billion and lease liabilities ended at $4 billion. The company also reported total assets of $12.76 billion and cash and equivalents of $877 million.

Based on the management’s EPS forecast for this year, Gap is trading at 7 times that figure. Meanwhile, based on the company’s cash flow generation capacity, its P/FCF ratio might stand somewhere between 17x and 20x depending on how Gap manages its inventory situation in the future.

Overall, Gap seems to be fairly valued based on both its current situation and prospects. With this in mind, both the downside risk and upside potential seem rather limited while maintaining or growing its current dividend seems challenging considering the firm’s poor cash-flow generation capacity.

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