In normal markets, news of a layoff can lead to a share price going higher. The market tends to interpret that as a company reducing headcount, especially if the company has been growing. Today, it may lead to a selloff, as traders may be concerned that the company is shrinking.
But companies that are looking to streamline just parts of their business, particularly in its executive suites with cuts at the corporate level, can send a message that they’re concerned about costs.
Apparel retailer The Gap (GPS) is one company making such a move now. They’re eliminating 500 corporate jobs in San Francisco, New York, and Asia. The move won’t affect things at the store level, and will allow the company to cut its expenses.
The retailer has seen shares sink 60 percent in the past year, even as revenue has declined just over 8 percent. The move to cut expenses will lead to higher profits, even with the same amount of cash flow.
Action to take: The steep drop in shares has taken the stock to under 9 times earnings. And the recently-raised dividend has pushed the stock’s yield up to 6.7 percent. Adding in the possibility of a rebound in the coming months, and shares look like a reasonable buy here for mid-double-digit returns.
For traders, the March 2023 $13 calls, last going for about $0.46, could deliver high-double-digit returns in the coming months, particularly on any spike higher in shares.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.