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Valuations Overview: Is Gap Accurately Priced?

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Valuations summary

In this part of the series, we’ll look at Gap’s (GPS) current valuations, compare them with other apparel and accessory companies, and analyze the past trend. We’ll also look at the company’s future earnings potential to gauge whether the company’s valuations are justified.

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Gap’s current valuations

Gap is currently trading at a one-year forward earnings multiple of 13.6x as of August 22, 2016. The company is cheaper than competitors PVH (PVH), VF (VFC), and Ralph Lauren (RL), which are trading at 16x, 19.5x, and 20.2x, respectively.

Although Gap is reasonable, it’s currently operating at the highest level of its one-year forward PE (price-to-earnings) per share range over the last one-year period. Its 52-week PE range is 8.4x–13.6x. This year, Gap has traded on average about 10.8 times the next 12 months of EPS (earnings per share).

Past earnings analysis

Gap’s sales and earnings have been under pressure since the beginning of fiscal 2015. The company reported a 3.9% decline in its top line and a 13.8% decline in EPS for fiscal 2015. Fiscal 2016 has been no different. The company reported declines of 43% and 6% in EPS for the first two quarters, respectively.

Earnings potential

Gap isn’t expected to be back on track for fiscal 2016. Wall Street has predicted an 18% and 14% decline in EPS for 3Q16 and 4Q16, respectively. EPS for fiscal 2016 is predicted to be $1.91, which is 21% below EPS for fiscal 2015.

However, the company is expected to come back in fiscal 2017 and 2018. Consensus estimates for those years are $2.06 and $2.15, respectively. reflecting yearly increases of 8% and 5%, respectively.

Investors looking to invest in Gap through ETFs could choose to invest in the iShares Morningstar Mid-Cap Value (JKI), which invests 0.44% of its holdings in Gap.

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