Gap's Fashion Sense

Despite the splashy TV ad campaigns that Gap (NYSE: GPS  ) has launched over the course of recent history, it continues to struggle with getting the retail recipe right. Last week's first-quarter earnings give investors reason to wonder when exactly the retailer can regain its previous might.

First-quarter net earnings at Gap decreased 7% to $291 million, or $0.31 per diluted share, although the company did meet analysts' expectations. Sales dipped 1% to $3.6 billion, while same-store sales fell 4% in the quarter. Gap needed to use markdowns to move merchandise, a burden on gross margin and a sign that something's amiss on the racks -- in other words, the styles apparently weren't quite what Gap customers were looking for during the quarter.

In its press release, the company pointed out its impressive earnings last year this time -- making for some difficult comparisons this time around, although last year's figures were helped by easy comparisons to the year before that -- but investors who have been watching this story know that things have been touch-and-go for the retailer over the course of recent history. Last quarter, longtime Fool Rick Munarriz took the company to task on several elements.

Some of us have probably noticed that some other retailers have recently shown much more success with shoppers recently -- just take a look at Urban Outfitters' (Nasdaq: URBN  ) recent earnings or Aeropostale's (NYSE: ARO  ) results. Another element that may affect Gap and other peers is a rumored upcoming "denim glut" -- the idea bears watching for those companies that rely on consumers' appetite for jeans.

Gap is a Motley Fool Stock Advisor pick, selected because of its improved balance sheet and newfound fiscal health after its period of angst several years ago. It's the kind of stock investors may disagree on, given the fact that it has indeed shown many signs of repairing its finances and does have a strong brand with staying power.

Further, the company did ratchet up its 2005 earnings to a range of $1.44 per share to $1.48 per share. It cited several elements that should help it going forward, such as a real estate decision that will positively affect second-quarter earnings. Also, the more Gap pays down debt, of course, the lower its interest payments are and the better its financial outlook going forward.

Along those lines, some may theorize as to whether the company might very well be a bargain at the moment, despite this current downer. Some of us, however, probably still want more consistent proof that the company can rejuvenate its fashion sense.

• Can Gap lure the older woman?
• Is Gap a bargain-bin retail stock?
• Some of us thought Gap's SJP ads became tiresome.

Gap is a Motley Fool Stock Advisor stock. To find out what other stocks the Gardners like right now, give it a try.

Alyce Lomax does not own shares of any of the companies mentioned. She found her own visits browsing through a Gap outlet and a Banana Republic store over the weekend uninspiring.