Gap (GPS)

A beaten up retail stock where they have to reduce footprint and increase online sales. Long term they have had these ups and down. If GPS-N is cheap it is usually a good place to get in.

*Short* Had a good run last quarter, and is up quite substantially, but is up substantially on not a lot of news, and with not anything particularly encouraging. Margins have dropped from 2014, where they were roughly 17%, and are now trending around 10%. Margins are contracting and they are struggling with e-commerce. The bright spot has been Old Navy which has done relatively well. This industry is very fickle in terms of fashion and getting that brand layup. Dividend yield of 3.61%. (Analysts’ price target is $26.20.)

Like many other retailers, it has suffered a bloodbath over the last year, and is down about 8%-10% this year. They haven’t been able to move the merchandise, and in this business if you are not moving the merchandise, you have to start discounting, which eats into the margins. He doesn’t see a real catalyst for growth in the future.

It is down 50%. Getting involved in fashion retailing is hard. Retail is brutal. Same store sales are declining in all brands. It is such a risky place to be.

Ralph Lauren (RL-N) or Gap (GPS-N)? Both of these are very reliant on the US consumer. This one generates about 80% of its revenues from the US while Ralph Lauren is 70%. Comparing these he would probably favour this one, primarily because they reach a wider scale of consumer. They have Old Navy at one end, the more economical play, Gap in the middle and Banana Republic for the luxury end. He doesn’t see anything wrong with either of these companies, but would probably look at a name like Nordstrom (JWN-N) instead, which gives you 500 brands.

Has had a 114% move in the last year. Plays into the value/price consumer theme. Probably a big beneficiary of a strong US$. Have been going through a significant restructuring which is starting to show margin improvement. You have to be careful with consumer discretionary. You could consider buying a small position and then come in again after earnings are reported on Thursday.