We recently published a list of The 10 best clothing stocks to buy now. In this article, we take a look at how The Gap, Inc. (NYSE:GPS) compares to other apparel stocks.
Trends in the clothing industry
The internet has changed the way people buy clothes. Social media platforms and influencers have popularized “haul culture,” where people order large boxes of inexpensive clothing online and then browse through them. Also known colloquially as the “Shein effect,” people are turning to fast fashion and ordering clothes that offer an element of surprise upon receipt. Although Shein’s main suppliers are based in China, its customers are primarily based in the United States. The company’s global sales reached around $30 billion last year, nearly matching the $39 billion global sales of Inditex, the old-school fast-fashion leader and owner of Zara.
Fashion and apparel are among the world’s most significant industries and create important value for the global economy. According to McKinsey, this would make it the world’s seventh-largest economy when compared to individual country GDPs. However, the industry faced several challenges in 2023, with the United States and Europe experiencing slow regional growth throughout the year. While China began the year with a strong performance, it gradually tapered off and slowed down in the second half. Even the luxury segment saw uneven performance and lower sales. The fashion industry in 2024 can therefore be described in one word: uncertainty. Weaker economic growth, dwindling consumer confidence and rising inflation are making it difficult for companies to develop suitable performance drivers. A Reuters report showed that consumers are becoming more selective in their clothing choices and are shopping more. This has led to a “patchwork of winners and losers.”
Fashion forecasts by McKinsey show that the industry is expected to grow by 2-4% in 2024, with growth varying by country and region. The luxury segment is expected to make the biggest economic gain, but that does not mean that companies in this sector will not experience difficult economic conditions. The global growth forecast for the industry is lower in 2024 compared to 2023, falling to 3-5% from 5-7% in 2023 as shopping sprees come to a halt after the pandemic. Growth in China and Europe is expected to slow, but the US market shows a completely different forecast. Growth in North America is expected to pick up in 2024 after a sluggish 2023, reflecting the region’s more optimistic forecast.
In addition, the current political unrest in Bangladesh is expected to affect the global apparel industry, disrupting the work of global clothing retailers from H&M to Zara. As these apparel giants head into the crucial holiday season, the disruptions could cause heavy losses for U.S. retailers and Bangladesh itself, which is the world’s third-largest apparel exporter as of 2023. Overall, consumer behavior in the U.S. has slowed, with people making do with what they have in their closets before the season changes. The Federal Reserve is also expected to cut interest rates in September. A report from Reuters showed that investors had previously bet that the Fed would cut rates by half a percentage point and now estimate a probability of about 75% for a quarter-percentage point cut at its September meeting. This should boost consumer confidence and ease spending behavior. With that in mind, let’s look at the 10 best apparel stocks to buy.
Our methodology
For this article, we used Finviz’s stock screener to identify over 20 apparel stocks. We then narrowed our list down to the 10 stocks with the most upside potential from current levels and listed the stocks in ascending order of their upside potential (as of August 19). We only selected stocks with a market cap of over $2 billion.
At Insider Monkey, we’re obsessed with the stocks hedge funds invest in. The reason is simple: Our research shows we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (Further details can be found here).
A young person walking confidently down the street wearing jeans and glasses.
The Gap, Inc. (NYSE:GPS)
Upside potential from current level: 19.24%
The Gap, Inc. (NYSE: GPS) is a specialty apparel company with a lifestyle portfolio of brands that includes Gap, Banana Republic, Old Navy and Athleta that appeal to different walks of life. The company has more than 3,500 stores and franchises worldwide and operates in over 40 countries. Gap’s products include lifestyle and fitness items, adult apparel and accessories, workout and athletic wear, travel apparel and everyday wear.
The company has fallen from grace in recent years, and in 2020 announced it would close about 30% of its North American Banana Republic and Gap stores by 2024, most of them in malls. The problem was simple: Gap didn’t grow up with millennials, losing the race for the apparel industry to trendier brands like Abercrombie & Fitch, American Eagle and fast-fashion brands like Shein. Although it grew with millennials, The Gap, Inc. (NYSE:GPS) failed to win the hearts of GenZ, the new generation that dominates apparel retail.
But now the company is making a comeback with a change in management and revised strategies. The Gap, Inc. (NYSE: GPS) is working to offer its customers a new layout, improved digital execution and greater cultural relevance while developing a more transparent pricing strategy. The company has improved its global standing under new CEO Richard Dickson by reducing its inventory by 15% year-over-year and increasing its margin by 340 points.
These changes led to the company’s revenue increasing 3% year-over-year in the first quarter of 2024. Revenue reached $3.39 billion, beating analyst estimates of $3.29 billion. The company’s revenue growth was driven by a 3% increase in store sales and a 5% increase in online sales. The stock trades at a P/E ratio of 13.68, a 13% discount to its sector. Analysts expect Gap’s (NYSE: GPS) earnings per share to grow 23.69% year-over-year by 2025.
The analysts who follow the company are mostly optimistic about the stock. TD Cowen recently upgraded the rating from “Hold” to “Buy” with a price target of $30. The main reason for this is that the company is in the early transformation phase for all brands in its portfolio.
The Gap, Inc. (NYSE:GPS) restructuring has caught the attention of analysts and investors due to its underestimated growth potential. The improved forecast provides Wall Street analysts with proof that the new CEO’s turnaround strategy of introducing trendier items and revitalizing marketing efforts is working. The Gap, Inc. (NYSE:GPS) has a Moderate Buy rating, and its median price target of $23.97 represents an upside of 19.24% from current levels. The company’s shares are currently undervalued, with revised policies and promising business growth showing. 39 hedge funds are bullish on The Gap, Inc. (NYSE:GPS) from the second quarter of 2024, with Two Sigma Advisors holding the largest stake.
Total GPS 4th place on our list of the best clothing stocks to buy. While we recognize GPS’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than GPS but trades at less than 5x earnings, read our report on the cheapest AI stock.
Read next: Analyst sees a new $25 billion ‘opportunity’ for NVIDIA and Jim Cramer recommends these 10 stocks in June.
Disclosure: None. This article was originally published on Insider Monkey.
