Never underestimate the power of diminished expectations.

For all the bad press Gap (NYSE:GPS) gets, the fact that investors seem to feel this cash-rich company is just moments from bankruptcy gives it cover to exceed expectations with great regularity. Yet while it's hard to find anything good written about the Gap these days, the company has in fact exceeded Wall Street earnings estimates in each of the last four quarters. Thursday afternoon, it gets the chance to start off the new fiscal year similarly well.

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts mind the Gap. Six say buy, 14 hold, and three sell.
  • Revenues. On average, they're looking for just 1% sales growth to $3.48 billion.
  • Earnings. Profits are predicted to fall 14% to $0.24 per share.

What management says:
The carnage continues in the retail sector. Like Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Limited (NYSE:LTD), Federated (NYSE:FD), Abercrombie & Fitch (NYSE:ANF), and AnnTaylor (NYSE:ANN), Gap had an absolutely horrid April. Total sales for the firm were down 11%. Same store sales simply collapsed -- down 16%.

Not a single Gap division had a good month, with "International" being closest to the mark at negative 5% comps. In order, the next "least worst" were Banana Republic North America at negative 13%, Gap North America at negative 14%, and Old Navy North America at negative 20%. Like everyone else in the retail space, Gap blamed a misplaced Easter on its fiscal calendar for much of the damage. But it also made ominous reference to "clearance selling at Gap brand" that caused "merchandise margins [to be] significantly below last year"

What management does:
Do I even need to say it? Expect the margin trends, shown below, to continue in Thursday's news.

Margins

10/05

1/06

4/06

7/06

10/06

2/07

Gross

37.5%

36.6%

36.4%

35.4%

35.9%

35.4%

Operating

11.6%

11%

10.5%

8.9%

8.5%

7.7%

Net

7.2%

6.9%

6.7%

5.8%

5.7%

4.9%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Two Fools say:
As longtime readers (and certainly our newsletter subscribers) will know, Gap is an official and active recommendation of two Fool newsletters, Motley Fool Stock Advisor and Motley Fool Inside Value. Ordinarily in this space, I'd tell you what each of our lead analysts, who recommended the stock, have to say about it.

But the thing is that for Stock Advisor, Tom Gardner just finished publishing his semiannual review of all picks, Gap included. To be fair to our paying subscribers, we cannot release his comments publicly here just yet. Suffice it to say that the stock has not been sold from the Stock Advisor portfolio, and infer from that what you will. Additional details forthcoming as soon as I'm permitted to write about them (or, if you've got ants in your khakis, grab the free 30-day trial on offer and you can read Tom's latest analysis right now).

Inside Value is a different matter entirely. Lead analyst Philip Durell updated us on his thoughts in January, and enough time has now passed that I can give you a few glimpses at his thoughts: "Gap was and remains an investment that hinges on a successful turnaround. ... There's only one problem: It hasn't worked ... [at least] according to the recent financials." Still, Philip notes that "our channel checks have confirmed positive trends on store traffic, offering anecdotal evidence that the Gap name isn't quite as broken as the numbers might suggest." Philip then goes on to discuss in detail the long-rumored "buyout scenario," in which private equity steps in to save shareholders from their stock. To read his full thoughts on that, including what he thinks a likely buyout price might be, claim your free 30-day subscription to Inside Value now.

Wal-Mart is an Inside Value recommendation. Limited is an Income Investor selection. Both newsletters are available for a free 30-day trial.

Fool contributor Rich Smith does not own shares of any company named above.