Having been braced for disappointmentearlier in the month, investors got a glimpse of Gap's (NYSE: GPS) problems after yesterday's second-quarter earnings report.
It's as simple as sales. Gap had a particularly negative July, with revenue and comps growth numbers surrounded by those dreaded parentheses. No surprise, then, that the company's revenues for the quarter were up only 1%, to $3.72 billion. The bottom line showed $0.21 per share, which looks like a drop from last year's $0.22, but keep in mind that the company retired its debt early and that cost $0.04 per share. The press release highlights "solid margin gains," and management should get credit for the 2.5% improvement in the gross margin. On the other hand, operating expenses grew 2.1% as a portion of sales.
What does this stumble mean for shareholders? First off, there's no need for panic. Gap's balance sheets look increasingly solid, especially with the extra $300 million in debt retired this quarter.
What Fools need to ask themselves is this: Is this a one-time bump or a symptom of deeper problems? Over the past few weeks, competitors such as Aeropostale (NYSE: ARO) and American Eagle Outfitters (Nasdaq: AEOS) have had summer blowouts -- 14% and 21% July comps growth. Also, although low-end retailers such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) have had mildly disappointing revenue realizations, these at least have proved positive. Clearly, the much-reported summer spending slump didn't hit everyone.
When Tom Gardner tapped Gap in April in Motley Fool Stock Advisor, he cautioned that the international business was crucial, and that's where the firm did worst this quarter, with -10% comps and a 5.2% drop in overall revenues. (Let's hope those numbers were already adjusted for foreign exchange gains and that they're not worse in constant dollars.)
If I owned Gap, I'd be even more worried about the flat results from Old Navy. This is where management plans to concentrate its store openings. Aimed at the younger, cheaper set, it underperformed precisely where the competition is managing to excel.
Slimming down operations is great, but to remain a market beater, Gap needs to prove it can move the merchandise. Investors should watch carefully.
For more Fools on fashion:
Seth Jayson is glad to see that the Gap is once again stocking clothes he'd consider wearing, but he has no position in any companies mentioned. View his Fool profile here.
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