Is It Time for Gap to Resurface?

OK, I admit it: The 40% increase in earnings Gap (NYSE: GPS  ) reported Thursday night after market close was certainly a nice surprise. However, there are still ample signs the retailer still needs to get its act together.

Gap's first-quarter net income increased to $249 million, or $0.34 per share. However, and in my humble opinion this is a big however, Gap's quarterly revenue fell 4.8% to $3.38 billion, and same-store sales fell a whopping 11%. Clearly, the Old Navy concept is still hurting badly -- comps fell 18% there. Further, last year's bottom line was hurt by the closing of its Forth & Towne concept, magnifying this year's gain. Excluding the $27 million loss last year, earnings grew a more modest 21%.

"Inventory management" or "inventory control" seem to be the "in" themes for many retail companies in the first quarter. After all, you want to be in control of that inventory if customers aren't going to want to buy, so you don't have to hustle a lot of merchandise using major markdowns as the lure. That's the case with Gap, too, which also emphasized its mad cost management skills during the quarter as well.

There were some bright spots. Gross margin increased to 39.7% from 38.2% this time last year, and that's a very good sign. And, as has long been the case (and a big deal to Gap bulls), Gap does have a lot of cash on its balance sheet; in fact, it has $1.8 billion worth. It also generated $62 million in free cash flow during the quarter. However, it's notable that cash flow from operations dropped more than 37%, hinting that some accounting manipulation could have helped boost the bottom-line figure. If this trend continues, it could signal that earnings growth won't be sustainable.

I've long been bearish on Gap, no offense to the folks at Motley Fool Stock Advisor and Inside Value who have recommended the stock. I simply need to see more signs that Gap can invigorate its brands, which have been tarnished for quite a few years. There are plenty of hot retailers out there that cater to young people, like American Eagle Outfitters (NYSE: AEO  ) , J. Crew (NYSE: JCG  ) , and Abercrombie & Fitch (NYSE: ANF  ) -- those are just a few examples. And of course, on the less expensive end of things, it seems pretty likely that "cheap chic" from places like Target (NYSE: TGT  ) helped take some of the wind out of Old Navy's sails.

Glancing at Gap's trailing price-to-earnings ratio of 16 also reinforces another problem I've long had with it -- it just never really looked all that reasonably priced to me, despite its long-standing difficulties. I wish Gap shareholders the best, because I know many have been waiting patiently, but it's still just not a stock that I consider tantalizing.

American Eagle Outfitters is a Stock Advisor pick, as well as Gap. The Fool owns shares of American Eagle.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 651834, ~/Articles/ArticleHandler.aspx, 10/20/2016 9:10:34 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,162.35 -40.27 -0.22%
S&P 500 2,141.34 -2.95 -0.14%
NASD 5,241.83 -4.58 -0.09%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/20/2016 4:04 PM
GPS $26.48 Down -0.03 -0.11%
Gap CAPS Rating: **
AEO $17.50 Up +0.02 +0.11%
American Eagle Out… CAPS Rating: ****
ANF $15.74 Up +0.29 +1.88%
Abercrombie and Fi… CAPS Rating: *
JCG.DL $0.00 Down +0.00 +0.00%
J. Crew Group, Inc… CAPS Rating: **
TGT $67.71 Up +0.18 +0.27%
Target CAPS Rating: ***