Gap’s (GPS) stock plummets as diversified supply chain struggles

After enduring a challenging period, Gap Inc. (GPS), a prominent clothing retailer, had recently been experiencing a surge in performance, greatly surpassing the expectations of Wall Street with their latest earnings report. The company recorded a full-year profit of $1.1 billion, showcasing an impressive increase of over 80% from the previous year. The earnings per share (EPS) stood at 54 cents, which exceeded the 34-cent consensus. Furthermore, the revenue for the quarter was reported at $4.15 billion, beating the estimates of $4.07 billion.

This notable achievement marked a pivotal turnaround for Gap, which had previously witnessed a decline in profits over the course of the last two decades. In response to the challenging market conditions, the company made pivotal decisions to close 340 Gap and Banana Republic stores in North America and reduce its corporate workforce by around 2,300 employees. The appointment of Richard Dickson, a former Mattel executive, as the CEO was a strategic move aimed at steering Gap back to success.

Looking ahead, Gap anticipates a modest increase in sales by 1% to 2% for the upcoming year, aligning with the estimate of 1.7% from LSEG. For the current quarter, the company projects sales to remain steady or experience slight growth, in contrast to the analysts’ prediction of 1.5% growth. CFO Katrina O’Connell expressed the company’s resilience, acknowledging the dynamic nature of the market and emphasizing the importance of focusing on factors within their control.

However, the unforeseen challenges of the global trade war instigated by President Trump’s tariffs have cast a shadow over Gap’s promising trajectory. Despite efforts to diversify their supply chain and minimize reliance on Chinese manufacturing, Gap found itself vulnerable to the escalating trade tensions. Shifting production out of China seemed like a strategic move until the reality of widespread tariffs unfolded.

With Vietnam, India, and Indonesia emerging as primary manufacturing hubs for Gap, the imposition of substantial tariffs on these countries has dealt a significant blow to the company. Vietnam faces a 46% tariff, Indonesia 32%, and India 26%, surpassing initial estimations and intensifying the impact on Gap’s operations. Consequently, the stock value of Gap plummeted by 22% in response to the unfolding trade war.

The repercussions of the trade war extend beyond Gap, affecting other retailers like Levi’s, who share a similar reliance on Southeast Asia for manufacturing. Analysts emphasize that the practice of seeking low-cost manufacturing bases has reached its limits, with no viable alternatives remaining. Tariff mitigation strategies, such as cost-sharing with partners, may provide some relief, but the options for relocating production facilities are severely limited. The reality dawns on Gap and its counterparts: there is no escape from the adverse effects of the escalating trade tensions worldwide.