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Gap Stock, GPS, Drops 16% – The Fashion Brand That’s Out Of Fashion?

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Updated 27 May 2022

Key points:

The Gap (NYSE: GPS) stock has dropped 16% premarket on the back of a bad earnings report. We could think of this as just being a little out of sync with tastes and they'll come back sure enough. Or we could also regard this as further evidence that The Gap faces systemic issues and so could be entering a terminal decline. That the short interest is just under 12% presently shows that some substantial number believe the worst situation could apply here.

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The big news triggering this is The Gap's results. GPS reported revenue only slightly off, a $10 million miss from expectations at $3.48 billion. It's earnings that were the real problem, minus $0.44 is $0.37 off those expectations. That's not, as we probably shouldn't say about a fashion retailer, a good look.

What makes it worse is the guidance given for the full year – low to mid-single digit decline in revenue and non-GAAP EPS of $030 to $0.60 as against previous expectations of $1.30.

At which point the question is, well, is this all reversible? It can, and does, happen to fashion retailers that they fade away, after all. That being rather the nature of fashion, that's it's a fickle creature subject to change. On the other hand, changing design is possible – but what if it's the business model that is in error?

Also Read: The Best Clothing Stocks to Buy

Physical retail is under pressure from online, that much we know. Brands like boohoo and Shein are charging into the youth clothing market – where Gap itself as a brand is concentrated. This brings with it another problem, which is that part of the point of Gap and such retailers is to be selling a particular style. That means large and long runs of very similar pieces. Yet the rest of the market is fragmenting. Inditex (Zara etc) were the first to pioneer this, short runs of ever-changing styles and designs over even a season, let alone years. Is there, in fact, a place still left for mass-market clothing retail?

By this is meant that obviously there will be large brands, but mass market to mean selling hundreds of thousands of the same item to many people. Has style simply become too individual, as with pronouns, these days?

There's also a story we like a lot about one Gap brand, Old Navy. They bowed to fashion by making all styles available in all sizes – XS to XXXL and so on for all lines. Then found that they had vast numbers of the outside edges of the lines remaining unsold, something to be solved with deep discounting. A part of that story as to why revenue was only slightly off and earnings well down. That's an amusement, a fashion house losing out by listening to current activist fashion.

But for The Gap this is what the big question is. Is there still a place in the fashion world for someone trying to sell long runs of clothing, often through physical stores? It's not just the issue over the designs themselves, or the image of the company. But the base business structure of the company? Answering that question gives the right side to take of a trading position.