Well, at least Gap (NYSE: GPS ) shareholders are accustomed to the kind of quarter the retailer reported after last night's close. It was simply more of the same: cost-cutting to increase profitability, and continued, disturbing sales decreases.
Same story, different day
The good news was that Gap's net income increased 3.4% to $246 million, or $0.35 per share. This beat analysts' expectations by a penny, just like last quarter. It's not exactly exciting, although I guess it's better than "missed by a long shot." (And as I commented yesterday about Hot Topic (Nasdaq: HOTT ) , it's certainly better than the horrific reports some retailers have issued after a terrible third quarter for consumer spending.)
On the other hand, Gap still can't get sales growth going again. Revenue decreased 7.7% to $3.6 billion, and overall same-store sales dropped 12%. None of Gap's three concepts provided a bright spot; Gap comps slid 7%, Banana Republic's comps fell 11%, Old Navy's comps plunged 18%, and the international sector's comps slipped 1%.
Last quarter, I found Gap less than compelling because of this same trend of falling sales. Cutting costs to increase profitability is nothing new at Gap, but I think investors should be concerned about what happens when the company's cut all the costs it possibly can.
It's true, cash is king
Granted, there's something to be said for Gap's ability to hold more or less steady in such an ugly consumer spending environment. Unlike Best Buy's (NYSE: BBY ) fairly terrifying tidings, and the glum third-quarter outlooks from Starbucks (Nasdaq: SBUX ) and Whole Foods Market (Nasdaq: WFMI ) , Gap also didn't issue any hair-raising warnings about its future.
Also in Gap's favor, it has $1.68 billion in cash on its balance sheet, and no debt. It has also generated $519 million in free cash flow thus far this year. That's how it has managed to go ahead and buy an athleticwear company, even as the credit crisis constricts companies with weaker balance sheets.
Gap's cash position admittedly gives it a certain appeal in these troubled times. Unlike struggling retailers burdened with onerous debt, at least Gap has the kind of cash that should make it a survivor. Still, for the long term, I'm bothered by the company's seeming inability to reignite growth.
Go for greener pastures
There are better retail stocks out there, in my opinion. For example, The Buckle (NYSE: BKE ) has been performing very well recently. Although it also "beat by a penny," its third-quarter net income jumped 31% as sales sailed 25.7% higher. Its comps also belied every indication of a nasty economy, surging 19.1%.
Another example of a retail outlier is Urban Outfitters (Nasdaq: URBN ) . Its third-quarter net income also increased 31%, as revenue jumped 26%. Its same-store sales also rose an impressive 10% in the quarter.
Both The Buckle and Urban Outfitters shares have been battered by the current market malaise, despite their admirable operations. The Buckle trades at 7 times earnings, and Urban Outfitters is trading at 10 times earnings. Interestingly, both stocks have lowly two-star ratings in our investor-intelligence database, Motley Fool CAPS, which leads me to wonder whether they're largely misunderstood. (Join CAPS absolutely free and let the community know what you think.)
Surviving is nice; thriving is better
Gap's stock has been beaten down by 46.8% in the last year, and it's trading at about seven times earnings. However, Buckle and Urban Outfitters are trading at similar multiples, and they certainly seem to promise far stronger growth. Personally, I've long followed Urban Outfitters, and I know it has smart, engaged management on its side.
Last but not least, I've long suspected that Gap's brands have been tarnished, maybe even irreparably so. Trying to turn a business around for years will do that to a brand, as customers finally give up and direct their loyalties elsewhere. I think many people can barely distinguish between Gap and Old Navy stores and wares, and they've become way too accustomed to discount prices as the company attempts to clear out stale inventory.
Meanwhile, I can imagine that when consumers in this recessionary environment are in the rare mood to spend whatever they can spare, they will likely go for retailers that offer them something special. Over the years, I have seen little evidence that Gap's merchandise offers any excitement -- just a degree of predictability. I was dismayed a few months ago to see it pushing its old-school standard, khakis. Yawn.
This holiday season, we may kiss some retailers goodbye. Gap may not be in that grave danger, with its clean balance sheet and massive store presence, so it should come through intact. If you're looking for stocks that will thrive, not merely survive, Gap just isn't on that list.
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