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GPS - The Gap


blainehodder
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I am starting to look at The Gap here... any must knows?

 

Looks like a great company at a fair price.  EBIT/Tev yield in bargain territory (on a relative basis) at 13%ish .  It looks to exhibit fairly stable per share growth. Excellent ROA, ROE, etc. The name should travel. I'm wishing I had looked at this closer 5 years ago. Online is cruising and same store sales aren't bad.  AMZN doesn't seem to be a huge threat in the near term.

 

http://www.gurufocus.com/financials/GPS

 

Anyone long The Gap?

 

 

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I'm long the GAP.  They have a great management team with a great track record in capital allocation (cost cutting, relocating of stores, share repurchase, dividends, etc) and are still expanding overseas while testing out the franchise model.

 

High insider ownership (42%), Cannibal (48% reduction in shares in past 10 years) while modestly valued by the market.

 

They share the similar traits to IBM in that they have had flat sales for the longest while, but the difference in that GPS' margins have stayed flat as well but IBM has increased slightly.

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  • 1 year later...

why do value investors tend to stay away from retailing?

 

 

Not sure that's completely acurate, but I tend to stay away from fashion retailers. The Gap is probably the one fashion retailer I'd consider though.

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why do some value investors tend to stay away from retailing?

added the word some. I guess i should be so definitive in my statements on here sometimes things are taken quite literally.

 

see below for video on why guy spier will never invest in retailing businesses

 

story definitely looks interesting at first glance, i like the ROE's at 30-40% over the past 5 years.

 

is there a debt problem? assets look to be mostly financed by debt rather than equity?

 

 

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In fact, taking advantage of the (currently) accommodating debt markets to increase the debt load and buy back more shares (or invest in store renovations) would probably not be a bad thing to do, IMO.

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I've been in and out of GPS for the past 5 years (out at the moment).

 

The things that are great:

- strong cash flow;

- growing international business;

- shareholder friendly mgmt. (rising dividend, huge share buybacks, took on LT debt at cheap prices to buy back equity);

- focus on basics means the brand is much more resilient and less volatile than most clothing based retail (Amer Eagle, Abercrombie, Forever 21, etc)

- decent management bench strength;

 

Things that give pause:

- Glenn Murphy was fantastic.  Still not sure we have the whole story as to why he left;

- Old Navy strong but with head of that group leaving, not sure it will continue to support the other brands;

- Results at Gap and BR have been woeful recently.  Usually comp store sales would hover around flat over a year long period with some ups and downs.  Recent results have been worrisome.

- margins have been suffering as they have had to rely on markdowns and coupons to drive top line;  Most of the rents have escalators in them and they just increased wages to min $15/hr which will further hurt margins;  Not sure how long FCF can stay > $1.2bn with top line shrinking.  YTD is not looking strong.

- J Crew developing new brands, H&M has huge expansion plans, Forever 21 hurting at younger segment.

- this year is the first that "Other" has been declining (Athleta and Intermix).  Athleta has been expanding hugely.  If that slows it could pressure overall growth;

- they never break out the economics on the franchises.  These are becoming a growing part of the business.  I'd love to see the economics on a franchise vs. owned store.

 

 

 

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dwy000 - thanks. Super useful.

 

I am slightly less worried on competition. The J Crew story has not been successful. My longer-term competitive worry is Zara/Inditex. But even with that competition, I think Gap fills a certain niche and has a certain kind of consistent, comforting design aesthetic that will continue to be appealing to people even 10-15 years out. I could not make that determination about some of the other things that landed on my desk in the past e.g. Abercrombie, Aeropostale, etc: those brands have no reason to continue existing, IMO.

 

The recent newsflow is quite bad but that's why the stock is at a 10% cash yield. If Gap does not continue shrinking into oblivion at the current pace and gets something right about the domestic business, this is more than a double in 5 years.

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Hi Grey - sorry I should have clarified on J Crew.  You're right, the namesake has a lot of problems right now.  But they have come out with 2 new brands, Madewell and another one that I can't recall right now, that are doing REALLY well.  Tough to count out Mickey Drexler. 

 

Tough to not grab at that 10% FCF yield!

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Debt is not a problem at all . In fact, they have net cash. The company is a capital allocation marvel. Take a look at any company spent huge on capex in retail for last 10 years, would have awful return on investment. These guys actually reducing the store count in US and increasing the store count in Asia(China) using franchise model.

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I've been looking at this too as it has fallen from mid 30's to high 20's

 

I was really impressed with management's capital allocation decision in 2011.  I will admit I kicked the the tires based on gps showing up in holdings of ESL.

 

Excellent write up and discussion. Old navy seems to be doing the heavy lifting as of late and with Larson leaving that could change (unknown )

 

But it  seems unreasonably cheap as of now

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As a consumer, I like Old Navy a lot. Not because they're cheap - but because I like the style of a lot of clothes there. I'd gladly pay more than they charge for their clothes.

 

I used to shop at the Gap, but there product selection (at least for men) has gone quite downhill in recent years (at least to my tastes). Haven't found anything to buy there in years.

 

I don't think I've ever found anything I like in Banana Republic, although my wife shops there on occasion when she needs nice work clothes.

 

The Athleta catalog comes in the mail, and I enjoy looking at that.  :)

 

This company has always seemed terrible at managing inventory to me. You go to one Gap or Old Navy and they have one selection of clothes. You go to another location in the other side of town, and the selection is completely different. You go to a location in the next state over (with the same weather, mind you) and it's a completely different selection. You go to their websites, and it can be nearly impossible to find a piece of clothing on their website that they actually have in your local store. They are helpful when you call them to order though. I've had a couple occasions where I found something I liked online (that of course wasn't available in my local stores), and they were able to call other stores and have the products shipped directly to me from other stores.

 

The Gap (and associated brands) aren't just retailers. They design and produce the clothes they sell. While this can give them a benefit over department stores like Macy's (that just sell other brands), they of course need to keep coming out with new designs/styles. At least with The Gap brand, they seem too focused on new styles, that they keep coming up with ugly crap, compared to just sticking with styles of clothes people actually want.

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  • 2 months later...

Made a small buy at just over $34 today.

 

They are having some troubles, which is why they are so cheap, but I think longer term it is still good.

 

 

Sub-10 p/e, good yield and balance sheet. Cutting bad stores and moving more stuff online. Down today on bad Old Navy sales, but the guy running it very well left last year, so they are in a bit of a transition there and I think they can get it back on track.

 

Management is shareholder friendly and about 40% family ownership, so take good care of things.

 

Plus everybody hates retail now as AMZN is going to take over the world and I think retail is not nearly as dead as people think.

 

One of the knocks against GPS is that they have poor inventory control and just send stuff to stores. But they've spent the last couple of years putting in new systems to address this and will be be able to better direct inventory to where it sells better, shorten new product cycles, better fulfill eCommerce, etc.

 

I think they are a smart company and hope this system is successful in addressing thing. If not, could be a long drawn out recovery.

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  • 3 years later...

GPS looks cheap. But as always in retail, those declining SSS make it difficult to value.

 

It looked cheap at $30 too.

 

I took a trip to the mall a year ago & lost all interest.

 

There's nothing like staring at row after row of undifferentiated merchandise, in high rent boxes with drop ceilings, to dampen your enthusiasm.

 

Will it be around in 10 years?

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