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Analyst on Gap stock: 'I don't think you need to go into the dumpster'

·Anchor, Editor-at-Large
·3-min read

Just like trying to catch a falling knife, it makes no sense to try to reach for shares of badly struggling retailer Gap despite the 45% crash in the price year to date.

"I don't think you need to go into the dumpster to find things that are really problematic to make a real return," said Wells Fargo retail analyst Ike Boruchow on Yahoo Finance Live. "There are plenty of companies out there where you can do that with much better visibility into the management team, strategy, and earnings power [than Gap]."

Boruchow added that while Gap's stock appears cheap valuation-wise, increased apparel discounting in the industry and deep problems at the company itself could create a value trap as profits wane.

"I think the place you don't want to be [invested in] is apparel," Boruchow said. "I certainly think low-end apparel with a lot of management turnover and a lot of inventory is the worst place you could be."

Indeed, Gap enters the second half of the year in chaos mode and in bad need of a leader to take charge.

In July, the company fired CEO Sonia Syngal after another quarterly sales warning — its second straight material warning this year — and said longtime board member Bob Martin will serve as interim CEO.

Gap said it expects sales for the second quarter to decline by high single digits. Operating margins are pegged to land somewhere between zero to slightly negative.

Syngal was seen as a potential savior for Gap when she took over as CEO in March 2020 from interim CEO and board member Robert Fisher, who in turn had stepped in for ousted chief executive Art Peck.

As the former CEO of Old Navy, Syngal was credited with reviving that important division and moved quickly in her early days as Gap's leader to inject a fashion sense back into the company. That included signing Kanye West to a pricey, long-term clothing design deal.

Syngal also worked to improve the company's supply chain and shutter underperforming stores.

Undressed mannequins are displayed during a Store Closing Sale at a GAP store in central London on July 28, 2021. - US apparel company Gap will close its 81 stores in Britain and Ireland by September but remain online there as it becomes a
Undressed mannequins are displayed during a Store Closing Sale at a GAP store in central London on July 28, 2021. (Photo by TOLGA AKMEN/AFP via Getty Images)

Unfortunately for Syngal, her time at Gap will be remembered for more promise than delivery — a byproduct, in part, of Gap letting customers down on size and style.

The company further made a major error, experts say, by expanding too aggressively into plus-size clothing at Old Navy. The initiative didn't meet sales estimates, and now Old Navy is being forced to offer steep discounts to clear the excess goods.

West's collection, meanwhile, hasn't met expectations or hasn't driven meaningful sales.

The onset of the COVID-19 pandemic on top of the aforementioned errors did little to help Syngal's turnaround cause.

"They are being affected, I think, by what every other big apparel chain is being affected by — too much stores, too much merchandising, too much sales, tons of competition," former Gap and J. Crew CEO Mickey Drexler said on Yahoo Finance Live. "You have got to have a niche, a point of view. What I would do is what I did the first day [there] in 1983. I went to every style in the company, throwing out, keeping in, and renaming everything."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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