Gap's Not On Track

Conventional wisdom suggests that the 2006 holiday season was disappointing for many retailers, because of a slew of variables like warm weather, gift cards, and some weird shoppers' form of "chicken," in which people waited until the last minute to get better deals on holiday gifts. Maybe that's why investors seem to be forgiving Gap (NYSE: GPS  ) for its December sales tidings. But comparing Gap to other retailers' performance during a single month is small-f foolish, since the company's big picture remains anything but rosy.

Same-store sales at Gap declined 8%, compared with a 9% decrease this time last year. Total sales fell 4% to $2.34 billion. The only bright spot was Banana Republic North America, where comps increased 2%. Gap North America, Old Navy North America, and International fell 9%, 10%, and 8%, respectively.

Even worse, Gap cut its full-year earnings guidance to $0.83 to $0.87 per share, from its previous guidance for earnings in the $1.01-$1.06 range. It also said it expects to generate $650 million in free cash flow for the year. That might sting less if Gap hadn't reduced its 2006 guidance a number of times this year. Back in February 2006, Gap guided for "modest" full-year 2006 EPS of $1.23 to $1.27 per share. (It's clearly gotten a whole lot more modest as the year has worn on.) Last February, Gap also expected to generate at least $900 million in free cash flow in 2006 -- that's gotten much more modest, too. Sigh.

Gap said it's actively reviewing its Gap and Old Navy concepts for new branding strategies, but I'd argue that Gap has a whole lot more to review when it comes to getting its act together. New leadership might help do the trick, but the company's dug itself into such a fashion faux pas that it's become hard to imagine Gap competing effectively against hipper, more popular retailers such as American Eagle Outfitters (Nasdaq: AEOS  ) or Abercrombie & Fitch (NYSE: ANF  ) .

The retailer's newer concepts don't have an easy time of it, either -- its Forth & Towne chain competes with companies like Chico's (NYSE: CHS  ) , Talbots (NYSE: TLB  ) , and Ann Taylor (NYSE: ANN  ) . And despite concerns about the viability of Gap's new Piperlime online shoe store, the company is now competing even with Amazon.com (Nasdaq: AMZN  ) ; the e-commerce giant said yesterday it's opening an online handbag and shoe store.

This is hardly a pretty picture, and these are the types of reasons why I nominated Gap as the "worst stock for 2007" (although our CAPS community denied it that dubious honor), fearing that its turnaround may never come -- not anytime soon, anyway.

Still, the last time I checked, Gap shares had recently gained a tad on the December sales news. It's nice that some investors are so forgiving of the continued deterioration of Gap's performance. I sure wouldn't be.

For more on Gap, see the following Foolish articles:

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Gap has been recommended by both Motley Fool Stock Advisor and Motley Fool Inside Value. American Eagle Outfitters and Amazon.com are also Motley Fool Stock Advisor picks. Whatever your investing style, the Fool has a newsletter for you.

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


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