Shares of Gap Inc. (NYSE:GPS) are in serious danger of falling off the face of the earth unless something drastic is done — and done quickly! After suffering a -4% decline on Thursday, April 7, off the back of poor March sales results, GPS stock tumbled nearly -14% on Friday. For the week beginning April 4, GPS stock lost -19% of valuation in the markets. As if the news could get any worse, the drop-off coincided with trading volume of 33 million shares — a magnitude not seen since October of 2014.
That puts GPS stock in a very precarious technical situation. No one wants to hold on to this stock, and it will be difficult to convince contrarian buyers to stick their necks out at the present juncture. High bearish volume and lack of technical support at Friday's market close of $23.85 means that there's a good chance that GPS takes a quick plunge to $22.25 — the bottom closing price of the year so far. That would imply volatility of roughly -7%.
Should prices drop to that level, it wouldn't necessarily be the end of the bloodbath. No, the pain could just be beginning. Without a convincing floor, Wall Street could really punish Gap Inc. A trip to the $16 or $17 range — or a -29% to -33% decline from the present market value — is a very real possibility. We've seen companies do far worse on far less.
But just how did Gap get themselves into this mess? Aside from the poor March results in and of themselves, this marked 12 consecutive instances where comparable store sales fell into the red. Sometimes, analysts and investors can be patient with a company if they perceive management is attempting to overhaul their business strategy. But in the case of GPS stock, time is a luxury that the markets are no longer interested in providing.
Really, there's no point. The premium brand labels for GPS — its flagship namesake Gap, along with Banana Republic — were poor, but characteristically so. Comparable sales at Gap Global fell -3%, whereas Banana Republic Global dropped an astounding -14%. Efforts to revitalize the product offering for both brands failed miserably. The premium stores also failed to capitalize on the Easter holiday as they had initially anticipated.
But the real nail in the coffin could be Gap's fighter brand Old Navy. Once regarded as the saving grace for the apparel company due to its enormous popularity with the young crowd, Old Navy comparable sales dropped -6%. This was in stark contrast to the 14% jump in sales it witnessed a year prior. The issue with Gap Inc. is sadly very clear — it can't win on volume, and it can't win on profitability margins.
This is why investors need to be very cautious regarding Gap's price-earnings ratio of 10.7. A low P/E doesn't always translate into good value. With the direction GPS stock is going, that ratio could just as well translate to no value. As the company faces pressure from all fronts, the idea of a long exposure to Gap becomes more and more risky.
I understand that everyone wants a good deal in the markets. All I can say for Gap Inc. is that you're likely better served shopping elsewhere.