The Gap Might Be Better Than You Think!

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.

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