We recently compiled a list of the 10 Best Clothing Stocks To Buy Now. In this article, we are going to take a look at where The Gap, Inc. (NYSE:GPS) stands against the other clothing stocks.

Trends in the Clothing Sector

The internet has changed the way people shop for clothes. Social media platforms and influencers have popularized the "haul culture," where people order a big box of low-priced clothes online and sift through them. Also colloquially known as the "Shein effect," people are turning towards fast fashion, ordering clothing that offers an element of surprise upon receiving. Although Shein's primary suppliers are in China, its customers are majorly US-based. Its global sales reached around $30 billion last year, almost touching the $39 billion in global sales made by Inditex, the old-school fast fashion leader and owner of Zara.

Fashion and apparel rank among some of the most significant industries in the world, creating key value for global economy. According to McKinsey, it would rank as the seventh largest economy in the world if placed alongside the GDPs of individual countries. The industry, however, faced several challenges in 2023, with the United States and Europe experiencing slow regional growth throughout the year. While China started the year with a strong performance, it gradually waned, slowing down in the second half. Even the luxury segment experienced uneven performance and slower sales. The fashion industry in 2024 can thus be described with one word: uncertainty. Weaker economic growth, dwindling consumer confidence, and rising inflation are making it hard for companies to devise suitable performance drivers. A report by Reuters showed that consumers are becoming increasingly picky about the clothes they buy, and are shopping around more. This has resulted in a "patchwork of winners and losers."

Fashion forecasts by McKinsey show that the industry is expected to grow by 2-4% in 2024, with growth variations across countries and regions. The luxury segment is anticipated to generate the largest economic profit, but that does not mean companies in this sector won't experience tough economic environments. Global growth forecast for the industry is lower in 2024 compared to 2023, going from 5%-7% in 2023 to 3%-5% as post-pandemic shopping sprees halt. Growth in China and Europe is expected to slow, but the US market shows a completely different outlook. North America's growth is expected to pace in 2024 after a sluggish 2023, reflecting the region’s more optimistic outlook.

In addition, the current political unrest in Bangladesh is expected to affect the global clothing industry, disrupting the functioning of global apparel retailers ranging from H&M to Zara. With these clothing giants heading into key holiday season, the disruptions might incur heavy losses to US retailers and Bangladesh itself, which is the third largest exporter of clothing in the world as of 2023. Overall, consumer spending patterns have slowed down in the US, with people making do with what’s in their closets before the season changes. The Federal Reserve is also expected to cut interest rates in September. A report by Reuters showed that investors previously bet that the Fed would slash rates by half a percentage point, and are now estimating an approximately 75% probability of a quarter-percentage-point cut in its September meeting. This is expected to drive consumer confidence and ease spending patterns. With that, let's look at the 10 best clothing stocks to buy.

Our Methodology

For this article, we used the Finviz stock screener to identify over 20 clothing stocks then narrowed our list to 10 stocks with the most positive upside from current levels, and listed the stocks in ascending order of upside potential, as of August 19. We only chose stocks that had a market cap of over 2 billion.

At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A young person confidently wearing a denim outfit and eyewear in the street.

The Gap, Inc. (NYSE:GPS)

Upside from Current Levels: 19.24%

The Gap, Inc. (NYSE:GPS) is a specialty apparel company with a lifestyle brand portfolio encompassing Gap, Banana Republic, Old Navy, and Athleta, targeting various life segments. It has more than 3,500 stores and franchises across the globe, and operates in over 40 countries. Gap’s products include lifestyle and fitness items, adult apparel and accessories, training and sportswear, travel wear, and everyday wear.

The company suffered a fall from grace in the past years, announcing in 2020 that it would close around 30% of its North American Banana Republic and Gap stores by 2024, most of them in malls. The problem was simple: Gap didn’t grow up with millennials, losing the apparel race to trendier brands like Abercrombie & Fitch, American Eagle, and fast-fashion brands like Shein. While it grew with millennials, The Gap, Inc. (NYSE:GPS) failed to capture the hearts of GenZ, the new generation dominating the apparel retail industry.

However, the company is now making a comeback with changed management and revamped strategies. The Gap, Inc. (NYSE:GPS) is working to provide its customers with a new layout, enhanced digital execution, and increased cultural relevance, along with drafting a more transparent pricing strategy. The company has improved its global standing under new CEO Richard Dickson, reducing its inventory by 15% as compared to last year and growing its merchandise margin by 340 points.

These changes resulted in a 3% year-over-year increase in the company’s revenue in Q1 2024, which reached $3.39 billion and outperformed analysts’ estimates of $3.29 billion. The company's sales growth is attributed to a 3% increase in store sales and a 5% growth in online sales. The stock is trading at a forward P/E of 13.68, a 13% discount to its sector. Analysts expect Gap’s (NYSE:GPS) EPS to undergo a 23.69% year-over-year growth by 2025 .

Analysts following the company have mostly been bullish on the stock, with TD Cowen recently upgrading it from a Hold to Buy rating with a price target of $30, with the primary reason being the company standing in the early transformation stages across all the brands in its portfolio.

The Gap, Inc. (NYSE:GPS)'s remodeling has caught the attention of analysts and investors due to its underappreciated growth potential. Its upgraded outlook is giving Wall Street analysts proof that the new CEO’s turnaround strategy of introducing trendier items and revitalizing marketing efforts is working. The Gap, Inc. (NYSE:GPS) sports a Moderate Buy rating, and its median price target of $23.97 represents an upside of 19.24% from current levels. The company’s shares are currently undervalued, with revised guidelines and management showing promising business growth. 39 hedge funds are bullish on The Gap, Inc. (NYSE:GPS) as of Q2 2024, with Two Sigma Advisors holding the highest stake.

Overall GPS ranks 4th on our list of the best clothing stocks to buy. While we acknowledge the potential of GPS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GPS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.