Fast-forward to 2025, and something surprising is happening: The company is quietly becoming a cash flow machine again.

When I see an old-school retailer generating real profits in a brutally competitive market, my ears perk up. That kind of turnaround – if it sticks – can make patient investors a lot of money.

Gap is the largest specialty apparel company in the U.S., owning Old Navy, Gap, Banana Republic, and Athleta. After years of uneven execution for the company, new leadership has spent two years tightening costs, refreshing brand identities, and modernizing supply chains.

The second quarter of fiscal 2025 showed that the plan is starting to click. Net sales held steady at $3.7 billion, with comparable sales up 1% year over year – the company’s sixth straight quarter of positive comps. Earnings per share rose 6% to $0.57, and operating margin came in at 7.8%.

Cash and equivalents hit $2.4 billion – the highest level in 15 years – and the company returned $144 million to shareholders through dividends and buybacks.

The Old Navy and Gap brands both posted gains, while Banana Republic showed early traction in its premium repositioning. Athleta remains a sore spot but has a new CEO from Nike to lead its reset.

Gross margin was 41.2%, down from 42.6% last year due to the lapping of last year’s credit-card benefit and tariff costs. Online sales rose 3% and now make up 34% of total revenue. Inventory climbed 9%, mostly from accelerated receipts ahead of new tariffs.

Management reaffirmed full-year guidance of 1% to 2% sales growth and an operating margin of 6.7% to 7%.

For a mature retailer fighting tariffs and fickle consumers, those are respectable numbers.

Let’s run Gap through The Value Meter and see what’s really happening beneath the surface.

Gap’s enterprise value compared with its net asset value sits at about 3.4, a touch cheaper than the market’s 3.8 average. That means investors are paying less for each dollar of assets than they would for a typical peer.

At the same time, the company is converting those assets into cash with unusual efficiency. Quarterly free cash flow now equals nearly 7% of Gap’s net asset value – six times higher than the broader market average.

What makes this more convincing is the consistency. Nearly half of the past dozen quarters showed growth in free cash flow, roughly matching the average company in our universe. That may sound ordinary, but in retail, ordinary stability can be a rare advantage.

Since surging 70% in a month at the end of 2023, the stock has seen some big swings, bouncing back and forth between $17 and $29. It currently sits right around the midpoint of that range.

Gap isn’t suddenly a growth rocket, and tariffs or shifting fashion trends could easily knock it off balance for a while. But right now, the company is quietly producing real cash, paying its bills, rewarding shareholders, and trading for less than it probably should.

That’s a setup long-term investors don’t see often in this sector.

The Value Meter rates Gap as “Slightly Undervalued.”

What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.

The post Gap: A Comeback Story That’s Starting to Cash In appeared first on Wealthy Retirement.

The stock has been on quite a roller coaster ride over the past year. It spent much of late 2023 and the first half of 2024 in a consistent uptrend, climbing from lows around $13 to a peak above $24 – an impressive 85% surge in just eight months.

However, the rally proved short-lived, with the stock suddenly plummeting over 25% to its current price near $18.

This sharp reversal raises some eyebrows. It might just reflect broader concerns about consumer spending in a potentially slowing economy… or it might point to more company-specific issues.

With the shares trading at a discount to recent highs, are they a compelling investment? Let’s run this iconic denim maker through The Value Meter to find out.

At first glance, Levi’s looks like it could be undervalued. Its enterprise value-to-net asset value (EV/NAV) ratio sits at 4.53, well below the average of 10.95 for companies with positive net assets. This suggests that you could theoretically acquire the entire business for less than half of what you’d pay for the average company.

But as I always remind you, a low EV/NAV alone doesn’t make a stock a screaming buy. We need to look at cash flow generation to get the full picture.

Levi’s has performed decently on that front, as it churned out positive free cash flow in three of the past four quarters. Its average quarterly free cash flow clocked in at 7.76% of its net assets during that span – modestly above the 7.26% average for firms with similar cash flow patterns.

The company’s second quarter results offer additional insight. Revenue grew 7.8% year over year to $1.4 billion, driven by an 8.2% increase in direct-to-consumer (DTC) sales. Gross margins also hit a record 60.5%, up from 58.7% in the second quarter of 2023.

This expansion, coupled with cost control measures, led to adjusted EBIT (earnings before interest and taxes) of $87 million, a huge improvement from $31.5 million in the same quarter a year prior.

So while Levi’s isn’t exactly printing money, it’s generating cash at a respectable clip. The company’s consistent cash generation also supports a 3% dividend yield, with a payout ratio of 36.1% of its forward earnings suggesting sustainability.

However, Levi’s is facing some challenges.

The fashion retail sector is notoriously fickle, requiring companies to constantly innovate in order to maintain market position. Additionally, lingering inflation and recession fears could pressure consumer spending on discretionary items like clothing.

The company’s brand strength and global reach provide some insulation against these risks, though, and its expansion of its DTC business (which now accounts for 47% of total revenue) should help margins as long as it’s executed well.

When we balance the company’s attractive valuation and steady cash flow against the inherent risks in its industry, the stock lands squarely in “fair value” territory.

Unsurprisingly, The Value Meter rates Levi Strauss & Co. as “Appropriately Valued.” While the stock isn’t a table-pounding bargain, it’s also not wildly overpriced.

What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.

The post Is Levi Strauss & Co. a Good Value After Its Sharp Decline? appeared first on Wealthy Retirement.