Will Gap Feel Holiday Cheer?

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Some investors have been waiting quite a while to see signs of life from Gap (NYSE: GPS). The once-mighty retailer has suffered protracted problems in jump-starting sales and wooing customers back to its Gap, Old Navy, and Banana Republic shops. Is the time nigh? Judging by last week's results, it seems the answer is: not so much. So much for holiday cheer when it comes to this big name in retail.

Gap reported third-quarter net earnings down 20% to $212 million, or $0.24 per share. Sales dipped 3% to $3.9 billion, while same-store sales languished by a whopping 7%. In the company's press release, CEO and President Paul Pressler came right out and admitted what so many investors were thinking: "Our third-quarter results were unacceptable."

None of this was a surprise, though. Our Foolish forecaster Rich Smith pointed out before Gap reported earnings last week that Wall Street expected these exact numbers.

Granted, Tom Gardner chose Gap as a Motley Fool Stock Advisor recommendation back in April 2004, partly because of its hard work in improving its balance sheet, its stable of strong brands, and its great chances for a turnaround. Furthermore, Fools have noted other bright spots in this increasingly deep and dark Gap, such as the company's recent repurchase of shares.

Personally, though, it's hard for me to feel too very optimistic about Gap when it's still forecasting a slow and sluggish holiday season. While Pressler said that Gap's problems are "fixable," the third-quarter results give good reason to question whether they will be fixed anytime soon, and I have long felt less than optimistic about poor, tired Gap compared with others in the retail universe. These days, hot retailers such as Chico's (NYSE: CHS) and Urban Outfitters (Nasdaq: URBN) have shown far more consistent success in wooing shoppers.

Gap's third-quarter margins fell as the company had to mark down merchandise to move it out the door, given "disappointing customer response to fall product." Free cash flow for the first nine months of the year clocked in at negative $120 million as Gap directed higher capital expenditures to open new stores. On the other hand, Gap's inventories per square foot decreased by 7%, showing that the company has been working hard on inventory management.

If you peek into the conference call transcripts, there's a recurring theme that it will take time for Gap to win back the customers that it has disappointed. Gap management admitted that while the company improved its financial picture and drove for operational efficiencies in recent quarters, it dropped the ball in providing "amazing" merchandise and "compelling store experiences."

The idea that repairing this Gap will take time seems a fair enough request, but many investors probably aren't warming to the idea. They've already waited a long time for Gap to stop disappointing its customers. When it comes to investors' patience, Gap's time may very well be running out.

Further fashionable Foolishness:

• Can a fashion makeover save Gap?
• There is a silver lining to Gap's clouds.
• Gap's closed-door Internet renovation sounded like another mistake.

Gap is a Motley Fool Stock Advisor pick. To find out what other companies David and Tom Gardner have selected as recommendations, please click here for a free 30-day trial.

Alyce Lomax does not own shares of any of the companies mentioned.