Thank Kanye West’s Yeezy for sending Gap Stock flying this morning

What happened

Actions of Difference (NYSE: GPS) were flying higher on Friday morning after the company announced a partnership with Kanye West’s fashion label Yeezy. As of 10:40 a.m. EDT, the stock was up 32% but had traded up to 42% higher.

This is the best news that Gap shareholders have had in some time. Even with the dramatic gains this morning, the stock is still down around 30% from 52-week highs and 22% from the same time last year.

GPS given by YCharts

So what

Yeezy is a $ 2.9 billion brand founded by famous musician West in 2015. Until now, however, she was best known for her shoes made in partnership with adidas. The shoes have become cult because of their limited supply and robust aftermarket. Some Yeezy shoes even sell for thousands of dollars.

In today’s announcement, Yeezy will also partner with Gap to create designer clothing for men, women and children. West will retain sole ownership of the brand and exercise creative design for future products. Gap said the clothing line will launch in 2021.

In clothing retail, one must maintain relevance by following modern fashion trends. By making a deal with one of the hottest brands, Gap is certainly taking a step in that direction.

A businessman rides a rocket expelling exhaust gases on a multi-colored bar graph.

Gap stock is trading higher thanks to its deal with Yeezy. Image source: Getty Images.

Now what

While today’s news is cool, Gap shareholders should dampen all this excitement a bit and remember why the stock has gone so low in the first place. The company has nearly 4,000 physical stores under brands such as The Gap, Banana Republic and Old Navy. These stores were closed due to the coronavirus, resulting in a massive 43% year-over-year drop in first quarter revenue.

That’s a big drop in revenue, and it’s particularly heavy for a clothing company like Gap. True, 25% of its sales came from e-commerce before COVID-19. It’s better than a lot of its peers. And online sales grew 13% in the first quarter. However, when overall sales decline, companies resort to promotional pricing to move inventory.

The same was true for Gap in the first quarter. Its gross profit margin fell 23.6%, in part due to promotional pricing. This creates an inventory headwind for the business that does not immediately abate once stores reopen and normal economic activity resumes.

As a result, Gap is still a stressed business. Investors should keep this in mind. That said, in itself, Gap’s partnership with Yeezy is encouraging. It could be a good income generator if it experiences similar success to the adidas footwear line.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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