Gap: Hope Springs Eternal

Lots of well-known retailers are suffering right now, but Gap (NYSE: GPS  ) seems to have won investors over, despite its disappointing July. Of course, while hope comes in handy when battling adversity, it can be a killer in investing.

Gap's comps dropped 7%, mostly dragged down by weakness at its Old Navy unit. Old Navy's comps plunged 18% after the company decided not to repeat sales events from last year's quarter, in which it posted flat comps. Gap North America's same-store sales increased 2%, and Banana Republic's increased 1%, but both had easy comparisons against a respective 13% decrease and flat comps last year. Gap's international segment's comps increased 11%, compared to a 6% decrease last year.

If Gap had a tough July, it's in good company. You probably noticed American Eagle Outfitters (NYSE: AEO  ) , Aeropostale (NYSE: ARO  ) , and Abercrombie & Fitch (NYSE: ANF  ) among the other retailers that apparently failed to resonate with shoppers in July, and they've had better reputations among consumers in the last few years.

This is no mere monthly anomaly for Gap. Disappointing performance has been "business as usual" here for quite some time, however strong consumer spending's been. Gap's comps have declined for 12 consecutive quarters.

Still, there are glimmers of hope. Gap guided for second-quarter earnings per share of $0.19 to $0.20, a far cry from analysts' expectations for $0.13. Its revised guidance does not include special items, such as costs associated with layoffs. And of course, Gap shareholders and observers know that the company recently named its long-awaited new CEO. (Some of us are leery about the pick, given his lack of experience in apparel retail.) 

I've been bearish on Gap for so long that it's almost painful. And while I can see why investors would take heart -- a new CEO, heartening second-quarter guidance, signals of margin improvement -- I'm still not convinced it's a deal right now. Gap's got a trailing P/E of 19; compare that to 16 for Abercrombie & Fitch, and a mere 13 for American Eagle Outfitters. Gap also sports a PEG of 1.69, compared to Abercrombie's 0.89 and American Eagle Outfitters' 0.73. In light of such figures, and Gap's recent performance relative to its rivals, it's easy to conclude that Gap's current price includes a truckload of wishful thinking. (Admittedly, the cash on its balance sheet lends that hope considerable credence.)

Gap said it will lay off 1,500 workers, or 1% of its workforce, as part of its strategy to cut costs. That may improve profitability, but under Paul Pressler, it ostensibly already learned that too many cuts may lead to lackluster merchandise and customer defections -- lethal complications in retail. Cutting corporate fat is good; let's hope Gap slices at the right places. The company's still far from proving that it can revitalize its brands and find itself again. Maybe investors should stop hoping; after all, the market is full of other, far more tantalizing retail prospects now.

Gap and American Eagle Outfitters have both been recommended by Motley Fool Stock Advisor. Gap is also a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned.

Read/Post Comments (0) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 533764, ~/Articles/ArticleHandler.aspx, 10/21/2016 10:17:26 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:02 PM
GPS $26.41 Down -0.07 -0.26%
Gap CAPS Rating: **
ANF $15.75 Up +0.01 +0.06%
Abercrombie and Fi… CAPS Rating: *
AROPQ $0.04 Up +0.00 +2.99%
Aeropostale CAPS Rating: *