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5

Mind the Ever-Widening Gap

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Gap (NYSE: GPS  ) may have done better than analysts expected with its fourth-quarter results, but let's face it: Gap's just not a very strong retailer in these tough economic times. Continuing an ongoing tale of woe, the chain recorded another weak quarter.

Fourth-quarter net income decreased 8.3% to $243 million, or $0.34 per share. Revenue fell 12.8% to $4.1 billion, and same-store sales plunged 14%. Same-store sales were weak across all three of its concepts, and as usual, Old Navy fared the worst, with a 17% plunge. Even the Banana Republic chain, which has often been a bright spot, saw its comps decrease almost as badly, falling 15%.

Gap was able to make up for the weak sales by cutting costs and controlling inventories. In addition, it was able to generate $981 million in free cash flow for the year, and it still has $1.8 billion in cash. While I'm not particularly high on Gap stock, I do admit that its cash position gives it a survivalist edge in the currently tough retail environment. That said, Gap's seemingly continual necessity to cut costs, even as it can't seem to increase sales, doesn't exactly champion the business's growth possibilities.

I have a hard time seeing exactly what different or interesting qualities Gap brings to the table. It doesn't really stand out against rivals such as American Eagle Outfitters (NYSE: AEO  ) or Aeropostale (NYSE: ARO  ) , much less the retailers that truly try to bring something different to the racks, like Urban Outfitters (Nasdaq: URBN  ) .

Gap's continued weakness seems destined to worsen further in our serious recession. I find retailers like Aeropostale and The Buckle (NYSE: BKE  ) , which have both been performing quite well despite the troubled economy, far more compelling.

Like I said, Gap's cash cushion does give it a nice safety net while the retail landscape gets ravaged, allowing it to stay alive as weaker, more debt-laden retailers get weeded out. On the other hand, I don't see many growth opportunities for investors here, since Gap is still struggling to boost sales. I believe its brand saw better days long ago, and will never recover its former glory. I still think it's a good idea for investors to steer clear of Gap.

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The Fool owns shares of American Eagle Outfitters. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Urban Outfitters. The Fool has a disclosure policy.


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Alyce Lomax
TMFLomax

Alyce Lomax is a columnist for Fool.com and an analyst for Motley Fool One. She specializes in environmental, social, and governance investing topics, and from November 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis.

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Related Tickers

7/31/2015 4:03 PM
GPS $36.48 Up +0.43 +1.19%
Gap CAPS Rating: ***
AEO $17.75 Up +0.39 +2.25%
American Eagle Out… CAPS Rating: ***
ARO $1.51 Up +0.08 +5.59%
Aeropostale CAPS Rating: **
BKE $44.23 Up +0.18 +0.41%
The Buckle CAPS Rating: *****
URBN $32.62 Down -0.38 -1.15%
Urban Outfitters CAPS Rating: ****

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