Gap Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of apparel giant Gap (NYSE: GPS  ) were dressed down by investors today, losing as much as 18% in intraday trading after the company reported first-quarter earnings.

So what: As has been the case with the consumer-staples companies I follow, Gap is getting clobbered by higher costs. First-quarter revenue declined 1% year over year to $3.3 billion, matching analysts' estimates, while earnings per share of $0.40 topped the $0.39 expectation. However, the company ominously reminded investors that cost pressures would have a big effect on the rest of the year, and it slashed expected full-year earnings per share from a high-point of $1.93 to $1.50.

Now what: The problem for Gap is partly cost inflation, partly the economy, and partly lackluster operations. The cost inflation part is obvious, but it's exacerbated by the fact that the economy is still sluggish, which makes it tougher for the company to raise prices fast enough to deal with cost inflation. And that's topped off by the fact that the company doesn't have nearly the cachet with consumers that it once did, and maybe more importantly, it appears to be letting inventories swell. As The Wall Street Journal pointed out, other companies -- notably Victoria's Secret owner Limited Brands (NYSE: LTD  ) -- have done a better job positioning themselves to deal with inflation and won't see nearly the impact that Gap expects.

At the high end of management's earnings-per-share guidance, Gap's shares currently trade at less than 13 times earnings. That certainly sounds cheap, but that'll only prove true if the company can get its act together and get the business moving in the right direction.

Want to keep up to date on these companies?

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• Add Limited Brands to your watchlist.