Gap’s Beauty Expansion: How the New Strategic Shift Impacts Valuation and Investor Expectations

If you have been watching Gap (GAP) lately, you will know the retailer just made waves with its announcement to enter the beauty and personal care market. Moving beyond jeans and tees, Gap is making a calculated bet on high-margin beauty offerings, with a pilot phase launching this fall at 150 Old Navy locations. By exploring partnerships with household names and adding shop-in-shops staffed by dedicated beauty associates, Gap is signaling that it is serious about reinvigorating its business and reaching new customers. This move could shake up how investors see this iconic brand.

This strategic pivot comes at a time when Gap’s stock has shown renewed momentum. Over the past year, shares are up 24%, reflecting both consistent quarterly performance and upbeat reactions to the company’s turnaround efforts, such as six straight quarters of positive comparable sales. Recent initiatives, including a new Disney-themed capsule collection and a share repurchase program, are also keeping the spotlight on Gap. However, the beauty expansion stands out as a statement on the company’s future direction and growth ambitions.

The question now is whether the market’s reaction is getting ahead of actual results. Is Gap a value play amid transformation, or is the stock already pricing in all the optimism about its next phase?

Most Popular Narrative: 2.4% Undervalued

The most widely followed narrative views Gap as moderately undervalued, suggesting its current share price is below fair value based on conservative profit and growth assumptions.

Ongoing investments in digital technology, supply chain optimization, and omni-channel retail (such as tech-driven inventory management, AI in demand planning, updated media strategies) enable Gap to better serve consumers' expectation for seamless integration across digital and physical channels. This supports efficiency gains and may contribute to margin expansion over the long term.

Curious how a classic apparel brand gets such a forward-looking price target? The answer lies in expectations of more than just steady revenue growth. Bold investments and presumed margin expansion, along with a notable valuation multiple, are at the center of this analysis. Stay tuned to see just how ambitious analysts think Gap can get.

Result: Fair Value of $24.38 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, persistent risks, such as ongoing trade headwinds and sluggish performance at Athleta, could quickly challenge the current optimism around Gap's valuation.

Find out about the key risks to this Gap narrative.

Another View: Discounted Cash Flow

Looking at the numbers through our DCF model, we get a distinct picture of Gap’s value. This approach suggests the stock could be priced differently compared to the market view. Which method provides a more accurate perspective?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Gap for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Gap Narrative

If this outlook does not fit your perspective or you want to dig into the numbers yourself, you can shape your own take on Gap in under three minutes: Do it your way.

A great starting point for your Gap research is our analysis highlighting 3 key rewards and 1 important warning sign that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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