The Gap, Inc. (NYSE:GPS) shares are up more than 47.86% this year and recently decreased -3.15% or -$1.08 to settle at $33.18. Ascena Retail Group, Inc. (NASDAQ:ASNA), on the other hand, is down -68.17% year to date as of 12/14/2017. It currently trades at $1.97 and has returned -1.01% during the past week.
The Gap, Inc. (NYSE:GPS) and Ascena Retail Group, Inc. (NASDAQ:ASNA) are the two most active stocks in the Apparel Stores industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect GPS to grow earnings at a 7.20% annual rate over the next 5 years. Comparatively, ASNA is expected to grow at a 21.00% annual rate. All else equal, ASNA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. The Gap, Inc. (GPS) has an EBITDA margin of 13.58%. This suggests that GPS underlying business is more profitable GPS’s ROI is 17.60% while ASNA has a ROI of -41.00%. The interpretation is that GPS’s business generates a higher return on investment than ASNA’s.
Cash is king when it comes to investing. GPS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.42. Comparatively, ASNA’s free cash flow per share was -0.19. On a percent-of-sales basis, GPS’s free cash flow was -1.05% while ASNA converted -0.56% of its revenues into cash flow. This means that, for a given level of sales, ASNA is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. GPS has a current ratio of 1.70 compared to 1.40 for ASNA. This means that GPS can more easily cover its most immediate liabilities over the next twelve months. GPS’s debt-to-equity ratio is 0.41 versus a D/E of 1.86 for ASNA. ASNA is therefore the more solvent of the two companies, and has lower financial risk.
GPS trades at a forward P/E of 15.50, a P/B of 4.29, and a P/S of 0.83, compared to a forward P/E of 13.31, a P/B of 0.46, and a P/S of 0.06 for ASNA. GPS is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. GPS is currently priced at a 15.69% to its one-year price target of 28.68. Comparatively, ASNA is -24.81% relative to its price target of 2.62. This suggests that ASNA is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for GPS and 3.30 for ASNA, which implies that analysts are more bullish on the outlook for ASNA.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. GPS has a beta of 0.93 and ASNA’s beta is 1.98. GPS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. GPS has a short ratio of 5.30 compared to a short interest of 15.15 for ASNA. This implies that the market is currently less bearish on the outlook for GPS.
Ascena Retail Group, Inc. (NASDAQ:ASNA) beats The Gap, Inc. (NYSE:GPS) on a total of 7 of the 14 factors compared between the two stocks. ASNA is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, ASNA is the cheaper of the two stocks on an earnings, book value and sales basis, ASNA is more undervalued relative to its price target. Finally, CLDR has better sentiment signals based on short interest.