Saturday, May 7, 2016

Recent Buy: Gap Inc


April 28, 2016: Bought 105 shares of GPS at $23.40 per share.

Gap Inc. (NYSE:GPS) is a global apparel retail company that offers apparel, accessories, and personal care products under the Gap, Banana Republic, and Old Navy brands, among others. The company operates in the specialty, outlet, online, and franchise channels. It has 375 franchise stores in 41 countries. GPS was founded in 1969, and is headquartered in San Francisco, California.

GPS has an 11-year streak of consecutive dividend increases. The company pays quarterly dividends of 23¢ per share in the months of January, April, July and October.

I already own 60 shares of GPS, acquired in March 2015 at a cost basis of $41.42 and a yield on cost (YoC) of 2.22%. The stock price has been trending lower since then, so I'm lowering my cost basis and increasing average YoC with this buy.

The question to answer is whether GPS is worthy of my continued investment. I think so, otherwise I wouldn't have increased my investment!

I now own 165 shares of GPS, with an average YoC of 3.07% and a cost basis of $29.95 per share. The stock now trades at $21.67 and yields 4.25%. Here is a chart showing my buy prices:


With this buy, I'm adding $96.60 to DivGro's projected annual dividend income (PADI). As of the writing of this article, DivGro's PADI totals $11,061.

The following table presents updated ratings of GPS from various sources:

 MorningStar Rating (*****
 Dividend.com's DARS Rating  3.3/5 (Neutral) 
 TheStreet Ratings C+ (Hold)
 The Motley Fool's CAPS Rating (***--) 
 Thomson Reuters StockReport+ (4/10) Neutral 
 S&P Capital IQ's Stock Report Buy (****-) Quality Ranking: A 
 Zacks Rank (Style Score)  3-Hold (VGM:A)
 Tipranks Analysts Consensus Rating   Hold
 †combined Value/Growth/Momentum score

According to Tipranks, based on 10 ranked analysts offering 12-month price targets in the last 3 months, the average price target for GPS is $27.22. Morningstar's fair value estimate is $40.00 while S&P Capital IQ calculates a fair value of $49.20.

Recently, I have started using the fundamental analysis tools provided finbox.io. The average fair value estimate of several models with default settings, is $29.03, which implies an upside of 34%.


Why GPS?


Recently, GPS released dismal comps and sales number for March 2016, marking the twelve consecutive month of negative results. At the same time, GPS management expressed concerns that first quarter results for 2016 will come in below expectations. The company continues to focus on strategic initiatives to improve performance. 

The company is experiencing competition from several well-established retailers, primarily on the basis of fashion, quality and service. Furthermore, the company's business is seasonal in nature. When GPS boosts merchandise levels in anticipation of good sales, it exposes itself to significant risk in case of seasonal failure. Finally, GPS continues to be exposed to currency headwinds, which will dent top and bottom-line results in 2016.

On the other hand, GPS is enhancing its eCommerce and Omni-channel capabilities to counteract the decline in brick-and-mortar retail. In the long run, these initiatives should benefit GPS and its ability to compete with online retailers. Also, GPS continues to leverage its globally recognized brands, including Gap, Old Navy, Banana Republic and Athleta. The company is increasing its international presence, including in China, Russia, South Africa and several Latin American countries. 

I like GPS's policy of enhancing shareholder wealth. GPS has a solid track record of maintaining disciplined capital management and a strong balance sheet. The company is continuing to boost earnings per share through large stock repurchases and shareholder returns through dividend increases.

105 shares of GPS adds $96.60 to DivGro's projected annual dividend income. I updated my portfolio to reflect this recent purchase. 
Do you own shares of GPS? Do you think GPS is a good dividend growth prospect?

10 comments :

  1. Interesting buy,we shop a lot a gap ,but never thought on buying the shares,they seems to be always busy especially old navy brand. good luck with it.

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    Replies
    1. Hi desi -- thanks for commenting and sharing your experience as a customer! As mentioned, it seems like GPS is struggling at the moment but they're implementing plans to enhance there e-commerce exposure. Along with increasing their international presence, I thing the company will be fine in the long run. Of course, there may still be some pain to experience (as an investor) for a while. Meanwhile, I'll collect the yield of about 4%!

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  2. Just bought 100 more shares myself this week, lowering my cost basis to $21.69 and raising my YoC to 4.2%.

    I like GPS's dividend prospects for two primary reasons:

    1) 43% insider ownership. If they can afford to pay themselves a dividend, I'm betting they will.
    2) Cash position. They're net cash position is only **slightly** negative at -$300M (they have $1.7B in debt with $1.4B in cash). Meanwhile, TTM dividend payments ($377M) are only ~40% of FCF ($868M). That is a very comfortable buffer.

    Granted, times are tough with comps declining, etc. But I think they will eventually get their poop in a group, and it's pretty safe to assume the dividend will continue to pay out while we wait. I doubt they'll increase it much in the near term given the headwinds they're currently facing, but they could afford to raise it if they really wanted to...even with declining sales.

    Works for me! Nice purchase!

    ReplyDelete
    Replies
    1. Hi catfishwizard!

      Thanks for reading and commenting! I added your blog to my blogroll.

      You certainly got in at a better cost basis than I did, but both of use were a little early. After further bad news as far as monthly sales go, the stock is down even more! Its "available" at less than $18 and a yield of 5.2%!

      I certainly hope the dividend will continue to be paid, even if it doesn't increase much. I think in the long run the stock will be fine. Right now the company is struggling, though. So fingers crossed that some of the new strategies start to pay off for GPS!

      Take care and all the best with your investments!

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    2. Thanks for the addition to the blogroll! I need to get a blogroll up...it's one of the many things on the to-do list. Once I do though...rest assured DivGro will be there.

      Yeah...thou can't time the market, so thou shalt not try to. Not fun to be a brick and mortar retailer this week is it? That's another thing I like about GAP...I think their bench depth is good enough to actually do the omnichannel thing properly.

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    3. You're welcome, catfishwizard -- take care and please visit again!

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  3. Whole retail industry could be interesting at this time.

    ReplyDelete
    Replies
    1. Many retail companies are struggling... GAP has some special challenges, but I believe in the long run they'll be fine.

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  4. Interesting buy. I hope it works out for you - sounds a bit of a contrarian buy, 12 months of negative growth doesn't sound too promising. Hopefully it's been oversold..

    Tristan

    ReplyDelete
    Replies
    1. Thanks for commenting, Dividendsdownunder! I think my buy was (obviously) a little premature and the stock price fell even further after weak monthly sales numbers. As a DGI investor, I'm OK with that as long as the dividend doesn't fall similarly! :-)

      Cheers
      FerdiS

      Delete

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