1 Stock You Should Leave out of Your Retirement Portfolio

Clothing retailer Gap Inc. (GPS) has a decent annual dividend yield. However, dividend payouts have declined in recent years. And given its bleak fundamental positioning, I think the stock may not be the best addition to a retirement portfolio. Continue reading….

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Apparel retail company The Gap, Inc. (Geographic Positioning System) offers apparel, accessories and personal care products under the Old Navy, Gap, Banana Republic and Athleta brands. The Company offers its products through its operating stores, franchised stores, websites, third party agreements and catalogs.

On August 15, GPS announced a dividend of $0.15 per share for the third quarter, payable to shareholders on or after October 26, 2022. The annual dividend of $0.60 yields a yield of 6.67% at prevailing prices. However, the company’s dividend payouts have declined to a CAGR of 17.7% over the past three years and a CAGR of 10.1% over the past five years.

GPS is down 60.9% year-to-date and 46.1% year-to-date to close its last trading session at $9.52. It’s down 5.7% over the past month.

Here are the factors that could affect the performance of GPS in the short term:

Yeezy deal off the table

Rapper Kanye West, now calling himself Ye, recently confirmed this ended the deal between his company Yeezy and GPS. Allegedly, GPS failed to fulfill its obligations under the agreement, which included distributing Yeezy products and setting up dedicated Yeezy Gap stores.

The partnership was announced in June 2020 and was expected to last through 2026. The first product in the Yeezy Gap line sold out in a matter of hours. Wells Fargo had predicted the partnership could bring in $1 billion in first-year sales.

Gloomy financial growth

For the fiscal second quarter ended July 30, GPS net sales declined 8.4% year over year to $3.86 billion. Non-GAAP Net income fell 89% from the year-ago quarter to $30 million. Non-GAAP EPS was $0.08, down 88.6% from the same period last year.

Analysts’ expectations are gloomy

Street EPS estimate year-to-date (through 2023) of negative $0.27 reflects a 118.8% decline from the previous year. Likewise, Street’s same-year revenue estimate of $15.61 billion points to a 6.4% decline year over year. EPS is expected to decline 9.9% annually over the next five years.

Skinny profit margins

GPS’s trailing-12-month net income margin and leveraged FCF margin of negative 2.40% and 7.00% are significantly lower than their respective industry averages of 5.86% and 1.71%. The stock’s trailing 12 month ROE, ROTC and ROA of negative 14.23%, 0.97% and 3.11% compares to their respective industry averages of 15.28%, 7.09% and 5.12% .

POWR ratings reflect a bleak outlook

GEOGRAPHICAL POSITIONING SYSTEM’ POWR ratings reflect this bleak outlook. The stock has an overall rating of D, which is Sell in our proprietary rating system. The POWR ratings are calculated considering 118 different factors, with each factor being optimally weighted.

The stock has a stability rating of D, which corresponds to its five-year monthly beta of 1.73.

GPS has a C rating for value. This is justified as its forward P/E multiple of 126.23 is 811.1% higher than the industry average of 13.85, but its forward EV/sales multiple of 0.58 is 47.2% below industry average of 1.09.

In the 67 camp Fashion & Luxury Industry in 58th place.

click here to view the additional POWR ratings for GPS (Growth, Momentum, Sentiment and Quality).

Check out all the top stocks in the fashion and luxury industry here.

bottom line

GPS’s Yeezy deal is off the table. In addition, the company is struggling with a weak bottom line and low profitability. With analysts expecting GPS’s earnings per share to decline this year, I think this dividend stock may not be the right addition to a retirement portfolio.

How Does The Gap, Inc. (GPS) Compare To Its Competitors?

While GPS has an overall POWR rating of D, one might take a look at its industry peers, Hugo Boss AG (DOMINANT) and J.Jill, Inc. (JILL), which have an overall rating of A (Strong Buy), and Chico’s FAS, Inc. (CHS) and H&M Hennes & Mauritz AB (HNNMY) which have an overall B (buy) rating.

GPS shares traded at $9.41 per share on Tuesday morning, down $0.11 (-1.16%). Year-to-date, GPS is down -44.79% versus a -18.49% gain in the benchmark S&P 500 index over the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets led her to pursue a career in investment research.


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