1 Thing Gap's Got Going for It

This article is part of our Rising Star Portfolio series.

Sometimes it's difficult to imagine that beleaguered retailer Gap (NYSE: GPS  ) has anything in its favor. After years of malaise, Gap still has at least one heartening factor in its favor -- but that may not make the retail stock worth our while.

In my search for socially responsible companies for my Rising Star portfolio, I recently noted Gap's spot on Ethisphere's "World's Most Ethical Companies" list for 2011. The clothier joins the likes of Whole Foods Market (Nasdaq: WFM  ) (which I purchased for the portfolio in May), Best Buy (NYSE: BBY  ) , and Target (NYSE: TGT  ) . Ethisphere applauded all its honorees for ethical leadership in their industries, reflecting the organization's credo: "Good. Smart. Business. Profit."

Gap dedicates a good portion of its website real estate to its efforts in corporate social responsibility. Among other efforts:

  • 100% of Gap branded denim complies with a Water Quality Program to ensure that wastewater is treated before discharge into the environment
  • The company has committed to reduce absolute greenhouse gas emissions by 20% in 2015 (from 2008 levels).
  • Gap's Personal Advancement and Career Enhancement Program (P.A.C.E.) trains participants in work and life skills. Some 5,000 female workers from six countries have taken part in the training

Retailers and consumer-facing brands haven't always had the best reputation when it comes to social responsibility. Shareholder advocacy organization As You Sow released its "Toward a Safe, Just Workplace Report" last year, grading companies on how well they avoided sweatshops and other human rights abuses within their supply chains.

The report included a scorecard with survey results pertaining to retailers' social labor practices throughout those supply chains. Gap scored a B. Only Levi-Strauss and Wal-Mart (NYSE: WMT  ) scored higher, with B grades. VF (NYSE: VFC  ) , which recently purchased uber-socially responsible Timberland, got the lowest grade of the respondents, C-. (Note that 18 companies did not respond to the survey.)

Gap also made a positive impression by landing the highest score (B-) in Management Accountability for social compliance. That's highly impressive, because the average score there was a dreadful D.

Given Gap's other problems, it's nice that the company receives props for good corporate citizenship. Does its single-digit price-to-earnings ratio also earn it a place in this portfolio?

Sadly, Gap's positive spin on corporate citizenship simply doesn't outweigh the fact that it hasn't been able to institute a real business turnaround. Its unimpressive revenues and sad same-store sales figures for years running tell me it's still fumbling.

Gap's worth watching, but not buying. Although my Rising Star portfolio is all about positive corporate behavior, I also want exemplary companies that will yield positive returns. If and when Gap gets its competitive groove back, it could find itself back in the running.

Alyce Lomax owns shares of Whole Foods Market in her personal portfolio. The Motley Fool owns shares of Gap, Whole Foods Market, Best Buy, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores and Whole Foods Market. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On September 16, 2011, at 6:00 PM, aaanglemyer wrote:

    I will have to disagree with the author on GPS.

    A good investment opportunity is one where the investor's expectations differ from those of them market. So, in order to determine the investment quality of any stock, one must first identify the expectations embedded in the stock price. It is the expectations embedded in GPS' stock price that make it a great investment opportunity.

    GPS' Price-to-EBV of 0.6 implies that the market believes that GPS' cash flows will decrease by 40%. This seems highly unlikely given that GPS' NOPAT has been positive and increasing over the past 4 years. Also, GPS has managed to have positive and increasing ROICs over the past 5 years ending with a 17.3% ROIC in fiscal year 2011.

    The upside to GPS is that even if GPS' cash flows do manage to decline, as long as they decline less than 40% they will beat market expectations. I think GPS is ripe for the picking and would be a great addition to any portfolio.

    Check out the following link on uncovering the market's expectations embedded in stock prices: http://blog.newconstructs.com/2010/05/19/how-to-make-money-p...

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