Could The Gap Inc. be the next target of activist investors?
Speculation about that possibility led shares of Gap to rise as high as $15.35 on Wednesday, before closing up 8.2 percent to $14.46 in Big Board trading. Gap’s market capitalization on Tuesday was $4.94 billion, but rose to $5.35 billion by the end of Wednesday’s trading session.
A report from Barclays retail analyst Adrienne Yih from last Friday began circulating in the investment community this week, and in that research note she floated the idea of splitting up the brands and a monetization of Athleta. Athleta has been mentioned in the past as a possible spin-off candidate.
Yih downgraded her rating of Gap to “Underweight” and put the share-price target at $13. Both actions squarely place Gap within the range that typically attracts activist interest, as Gap has traded as high of $37.63 in the last 52 weeks. Higher inventory levels and lower sales, as well as increased promotional activity at Gap and Old Navy contributed to downgrade decision. She also sees possible activist activity as a negative for the company. While Athleta has been strong, the other brands in the Gap portfolio—Gap, Old Navy and Banana Republic—haven’t fared as well.
In contrast, Wells Fargo retailing, specialty softlines and e-commerce analyst Ike Boruchow has an “Overweight” rating on shares of Gap, with a price target of $20. While activist interest could help to unlock some value within the portfolio, Boruchow’s research note on Wednesday shows a sum-of-the-parts analysis reflecting an undervalued Gap Inc. that has upside potential once the businesses are right-sized so they can return to their historical strength. That’s presuming management can execute on its plan for 10 percent margins by 2024, reach $2 billion in sales at Athleta over the next few years and grow the Old Navy brand. The management team would need to do cost-cuts and real estate streamlining efforts to right-size the core Gap and Banana Republic businesses.
He pegged the activewear brand as having an enterprise value of $5 billion. That’s just under the $5.5 billion to $5.6 billion in enterprise value for Old Navy, but significantly higher than the $1 billion for Gap and $300 million estimated for Banana Republic.
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In total, those figures would give Gap Inc. a combined enterprise value of $11.8 billion to $11.9 billion, or a 9 times consolidated EBITDA multiple and a 0.7 times consolidated sales multiple. After factoring current net debt of $607 million, $1 billion in separation costs, Boruchow concluded that the equity value for Gap would be between $10.2 billion to $10.3 billion, implying a per-share price of $28.
Gap has already done its own split-up analysis. In February 2019, the company had planned to spin-off its Old Navy business. That was under the leadership of former Gap president and CEO Art Peck. But Peck got booted in November 2019, leaving the spin-off plan up in the air. By January 2020, talk of a spin-off was put on hold, and three months later in March Sonia Syngal—who was global president of Old Navy and had been slated to become the brand’s CEO following the spinoff—was named the chief executive of Gap Inc. Seven months later in October, Syngal’s team unveiled Gap’s Power Plan 2023 as its go-forward strategy. That plan includes a move away from mall-based real estate that includes a shrinkage of the store fleet by 30 percent and investments in technology and digital as it eyes demand-generation online.
Gap in March said it narrowed its fourth quarter net loss to $16 million, compared with a net loss of $184 million in fiscal 2019, on a 3 percent decline in net sales to $4.5 billion over the same period. Many companies have used comparisons to 2019’s pre-pandemic levels as a better indicator of how they are doing due to closures and Covid disruptions in 2020.
Activists have been busy in the retail sector of late. Most recently targeting Kohl’s, a process that has led to multiple bidders emerging for the department store chain.
Could activists target Gap? Sure, but it might not be an easy battle. That’s because the Fisher family still own about 15 percent of Gap’s outstanding shares, and three family members—John, Robert and William Fisher—sit on the company’s board. Gap was founded in 1969 by Donald and Doris Fisher. He passed away in 2009, while his wife is an honorary lifetime director at the company.