What Can Gap Do to Avoid Falling on Its Face?

Gap's monthly sales have been a roller coaster of success and failure -- is there anything it can do to smooth the ride out?

Jul 13, 2014 at 9:30AM

After a surge in popularity and a return to its roots in 2012, Gap (NYSE:GPS) has sputtered. The company's three major brands -- Old Navy, The Gap, and Banana Republic -- never seem to be quite lined up, and the company confirmed with its June sales report that the misfires are continuing. Comparable sales grew below the market's expectations and the stock took a small hit.

Gap's struggles have kept it from dominating the teen market in the way that seemed possible just a year and a half ago. Tighter wallets and more competition have certainly played their parts in the company's lackluster results. Does that account for Gap's high highs and low lows, or do we need some other explanation?

Gap's fundamentals remain strong
One reason I've always liked Gap is the strength of its management. Even in its current state, the company has held on to solid fundamental positions: Its debt-to-equity ratio is low, its cash on hand continues to give it flexibility, and it pays out a consistent and relevant dividend. With that solid foundation, the company has also felt comfortable taking on new businesses and trying new things.

Its most relevant supplementary brand is Athleta, Gap's answer to lululemon athletica (NASDAQ:LULU). As Lululemon has fallen apart over the last year, Gap has grown Athleta to take advantage of the market opportunity. The business, which had just 30 stores at the end of 2012, is on track to have 100 locations by the end of the year. That has given Gap a chance to jump on Lululemon's falling comparable sales, declining margins, and overall brand weakness -- all thanks to some sheer pants.

In short, Gap has all the pieces to be a consistent brand. It has a solid business backing a huge brand -- the 100th most valuable in 2013, according to Interbrand -- and an eye on future growth with Athleta. So why can't it hold it together?

Gap's failure in June
Looking at June's sales result, it's clear that something isn't right. The Gap and Banana Republic both had a 7% drop in comparable sales, while Old Navy managed a 7% increase. That's not a good overall position to be in. Across its brands, Gap's comparable sales fell 2%; the market was expecting a small increase, according to Thomson Reuters.

The market is the easy explanation for the problem. Wage growth in the U.S. has been stuck in the low single digits for years, causing parents to tighten their purse strings and leaving teen retailers out in the cold. Gap has fared better than some, but it's still not making waves. This is one of the rare cases in which the easy answer might actually be the right answer.

In a "normal" fashion cycle, companies rise quickly but fall relatively slowly. As new lines become popular, they jump up the ranks. Afterward, when the new hot thing is determined, there's a hangover effect. Latecomers will still move in and the brand will slowly die off. In the current setting, though, there isn't money available to support a falling brand. There's still a jump to popular brands, but the falloff is much sharper as brands flicker in and out of fashion.

Gap has been unable to keep all of its brands hot at any one time. Old Navy did well in April and June, but Banana Republic took the lead in between in May.

Gap's problem is consistency and its inability to smooth out its falls. To improve, it needs to do a better job of pre-emptively phasing in marketing and promotions to keep its falloffs smooth instead of sharp. If it can manage that, then it just might ride the highs of this current cycle without risk of bottoming out. All the pieces are there, it just needs to use them in a more consistent manner.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica. 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 fool.com.

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 www.fool.com/beginners, 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 www.fool.com/podcasts.

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