The Gap Might Be Better Than You Think!

On Apr. 10, The Gap reported that its comparable-store sales came in lower than investors had hoped for and this sent its shares down 2%. With the business trading near its 52-week lows, should investors consider jumping in or is American Eagle Outfitter or Abercrombie & Fitch a better prospect?

Apr 12, 2014 at 7:28AM


Source: © BrokenSphere / Wikimedia Commons

After the company reported its operating results for the month of March, shares of Gap (NYSE:GPS) fell more than 2% to close at $38.40. Admittedly, the company's drop in share price came when the S&P 500 fell 1%, but its decline nevertheless indicated the loss of some investor confidence. However, with the shares of the iconic retailer trading just 6% off their 52-week lows and at a hefty 18% discount from their 52-week highs, has the company fallen too far? Is Gap now an attractive value play, or should investors look to American Eagle Outfitters (NYSE:AEO) or Abercrombie & Fitch (NYSE:ANF) for good prospects?

Gap's March sales disappointed!
For the month, Gap reported revenue of $1.51 billion, 3% less than the $1.56 billion the company reported in the year-ago period. According to management, the drop in revenue stemmed from a 6% falloff in comparable sales for the quarter. This, in turn, was driven by a decrease in brand performance that management attributed to Easter moving from March to April.

During the month, Gap's Old Navy Global and Gap Global brands saw their comparable sales plummet by 7%. This was somewhat cushioned by a decline of just 4% in comparable revenue for the company's Banana Republic Global brand. In spite of these shortcomings, the company reaffirmed its guidance and it believes that earnings per share for the year will fall somewhere between $2.90 and $2.95, up around 6% to 8% from the $2.74 the business earned last year.

However, is this nothing more than a small bump in the road?
Over the past five years, Gap has done really well for itself. Between 2009 and 2013, the company's revenue increased 14% from $14.2 billion to $16.1 billion. According to the company's most recent annual report, its comparable-sales growth has been, in aggregate, 2% over this time-frame, which leaves the 10% jump in store count to pick up the slack.


During this same five-year period, American Eagle Outfitters did almost as well as Gap did with its revenue climbing 12% from $2.9 billion to $3.3 billion. Like Gap, the company benefited from a 2% increase in comparable-store sales but a 1% decline in store count from 1,075 locations to 1,066 hindered it. A 4.5% jump in total selling square feet offset this.

Abercrombie & Fitch performed the best out of the three as over the past five years it grew its revenue a whopping 41% from $2.9 billion to $4.1 billion. This jump in sales came in spite of a 24% drop in aggregate comparable-store sales and the closing of 8% of the company's stores in operation as its store count dropped from 1,096 locations to 1,006.

In terms of revenue, Gap fell in the middle of the road between its two peers. However, the company beat them handily when you look at each business from a profitability perspective. Over the past five years, Gap's net income jumped 16% from $1.1 billion to $1.3 billion. This mostly came from the company's jump in revenue but Gap can also chalk this up to its operating expenses falling from 25.7% of sales to 27.5%.


Meanwhile, Americans have been hit hard by rising costs. During the same time horizon considered for Gap earlier, American Eagle's net income fell 51% from $169 million to $83 million. This decline came after the business hit record net income of $232.1 million in 2012 and incurred a $44.5 million impairment charge, while its cost of goods sold jumped from 60.1% of sales to 66.3%.

Abercrombie & Fitch has done the worst in comparison with its peers. Between 2009 and 2013, the company's net income skyrocketed from $0.3 million to $54.6 million. While this looks good, investors should keep in mind that the business booked a net loss from discontinued operations in 2009 that amounted to $78.7 million.

Excluding this, the company's bottom line actually contracted by 31%. To make things even worse, Abercrombie & Fitch's net income plummeted 77% from 2012 through 2013, which suggests that the business is not as sound as it seems. In addition to an $105.1 million impairment charge in 2013, a 9% drop in revenue from 2012 negatively affected the business' bottom line.

Foolish takeaway
Right now, Gap's picture may not look great to Mr. Market, but the Foolish investor would be wise to consider the company's shares as a prospect. Yes, the company's top line has been hurt slightly this past month but its long-term performance suggests that its management has been doing something right. In contrast, American Eagle's situation looks anything but good because its profits have fallen off a cliff, while Abercrombie & Fitch's revenue growth has been appealing but it seems to have hit an inflection point.

I bet you never dreamed of wearing this...
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Daniel Jones has no position in any stocks mentioned and neither does The Motley Fool. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers