Gap's Like Waiting for Godot

This year, more than a few high-performance companies have faced the market's wrath for even the smallest short-term blunder.

Gap (NYSE: GPS  ) seems to buck that trend, though, considering that it reported yet another lackluster quarter in a long string of such quarters. But last time I checked, its shares were going up. They've risen 7% this year, despite scant evidence that things are going better. (Consider it one of those great market mysteries you run across every once in a while).

Gap's third-quarter net income fell 11% to $189 million, or $0.23 per share. Sales were flat at $3.9 billion, and same-store sales fell 5%, compared to a 7% decrease at the same time last year. There are some similarities to last quarter's results, and of course, that's not good.

Last time around, Gap reduced its full-year earnings estimate to somewhere in the $1.08-to-$1.12-per-share range. Now it's further cut its earnings expectation to between $1.01 and $1.06 per share. The company said that there has been a "deceleration of momentum" at Old Navy and "a slower turnaround pace" at Gap. Indeed, Banana Republic managed to eke out a 3% increase in comps, but the Gap North America, Old Navy North America, and International segments reported comps decreases of 7%, 7%, and 6%, respectively.

In an interesting aside, Gap said in its conference call that it has ratcheted down its target for its cash balance to $1.5 billion from $2 billion. (It has $2.4 billion in cash on the balance sheet now.) It plans to deploy cash to invest in its business, increase its dividend, and for share repurchases. And of course, that cash on the balance sheet has been a big selling point for Gap stock even in the darkest times. (Indeed, not everybody is as pessimistic as I am when it comes to Gap -- it's been recommended for both Motley Fool Stock Advisor and Motley Fool Inside Value.) At least returning some of that cash to shareholders is a consolation prize for those who have stuck it out.

Regardless, I wouldn't be playing this waiting game. Gap's access to cash isn't enough to compel me to want to own a retailer that's been flubbing fashion for years, and even though it has plenty of work to do in its core businesses, it seems like it's also coming up with weird ideas out of left field, like online shoe store Piperlime. Meanwhile, there are plenty of hipper, hotter retailers -- read: rivals -- right now, too, including Abercrombie & Fitch (NYSE: ANF  ) , American Eagle Outfitters (Nasdaq: AEOS  ) , and Aeropostale (NYSE: ARO  ) . Compared to some of the new youth-oriented retailers, I've often contended that Gap's frequent fashion misses have simply tarnished its brands.

Last quarter, my Foolish colleague Seth Jayson suggested heads need to roll at Gap, and I agree. This long malaise really sounds like Gap has strategic problems at the top. It's no good when a company, long expected to turn around someday, becomes reliable only in its ability to disappoint. I believe in patience in investing, especially when a company's long-term strategy is intact, but waiting this long for a turnaround should make investors wonder whether the wait's going to be worth it -- and whether their dollars could be put to better use elsewhere.

Mind the Gap with further Foolishness:

Gap has been recommended byMotley Fool Stock AdvisorandMotley Fool Inside Value. American Eagle Outfitters is also a Motley Fool Stock Advisorrecommendation.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool's disclosure policy is always in fashion.

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