Shoppers may be fickle, but so are investors. How else could you explain the fact that one of the greatest retail growth stocks of the 1990s has been halved on this side of the millennium? Yes, Gap (NYSE:GPS) has been hit hard by changing tastes, but it's starting to bounce back. Meanwhile, Abercrombie & Fitch (NYSE:ANF) has seen its shares climb during the 2000s, despite a troubling trend of posting negative same-store sales lately.
Ready to try both stocks on for size? I thought you'd never ask. Right this way. Let's dress them down.
Into the Gap
Somewhere between the alienating West Side Story ads and the faux pas of approaching animal activist Chrissie Hynde to score a leatherwear ad, Gap lost its touch. The retail giant that had successfully swayed consumers into denim and then into khakis lost its power of persuasion.
The company went on to suffer through 30 horrific consecutive months of negative same-store sales growth. Its performance shortcomings are no doubt familiar to our Stock Advisor subscribers who have been warned of Gap's malaise.
But just as Gap was starting to become a Mickey Mouse company, it landed a new CEO from the Mickey Mouse Company. It was a case of perfect timing for Disney's (NYSE:DIS) Paul Pressler. The slide in comps subsided, and the company has been clawing its way back to relevance ever since. Is Pressler in the process of carving out a Cinderella ending?
Earnings more than tripled this past quarter, as the company's reluctance to discount its wares as aggressively as it had in the past produced healthy margins on respectable sales. By putting the brakes on its breakneck global expansion strategy, Gap has been able to focus on its problems and, by most accounts, is winning the battle. After its two-and-a-half-year comps debacle, it has managed to string up 10 straight months of same-store sales gains. Granted, this may have been a layup given the shrinking benchmarks over the past couple of years, and Gap is still far from its 2001 sales peak, but it's clearly moving in the right direction now.
Between Old Navy, Banana Republic, and the various incarnations of its namesake store, Gap has more than 165,000 employees in 4,230 locations worldwide. It's large, and apparently after a few periods of rudderless living, back in charge.
Go Fitch
Does being hip mean never having to say you're sorry? Abercrombie has had its share of controversy over the years. From moralists up in arms over the company's racy magalogs to minority groups accusing it of Aryanesque hiring practices, one thing folks can't picket is the specialty retailer's success.
In the fickle world of mall-based fashion, the company has managed to grow earnings through an impressive streak of 29 consecutive quarters. It has been able to do this by keeping costs low and markups high despite posting negative monthly comps through most of the past two years.
Abercrombie has been one of the few to resist the temptation to discount deeply. While that has cost them in sales, it has obviously not dinged the quality of those sales. By keeping markdowns to a minimum in order to maintain its upscale status as an aspirational brand, the company has been able to maintain healthy margins even as the registers have slowed.
With 625 locations -- and growing -- Abercrombie isn't going to sit and wait for the economy to bounce back and shoppers to embrace its upscale prices. Fashionably early, Abercrombie continues to expand because it knows this is one snazzy soiree it's not going to want to miss.
Put it all together
Are these passing ships? Just as Gap is starting to recover, Abercrombie is tempering its bottom-line growth expectations. While even the casual shopper will tell you that the companies have little in common, they're not as different as one might think.
Both companies started out as top-of-the-line specialty retailers and eventually introduced sibling concepts to provide lower price points to its consumers. Gap did it with Old Navy and Abercrombie is trying to accomplish a similar feat with Hollister. Each company also rolled out a concept for kids apparel bearing its flagship store brand's name.
Despite recent gains in both stocks, they are still reasonably priced. Gap is trading for less than 20 times next year's profit outlook and those prospects are trending positive. Abercrombie is fetching just 12 times next year's earnings. Retail bargains? Apparently, but keep it quiet. Don't tell the companies. You know how sensitive they are to these kinds of markdowns.
Rick Munarriz wasn't born to shop but he's a quick learner. He's spent enough time over the years at both chains but does not own shares in either company. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
