Shares of apparel retailer Gap (NYSE:GPS) were up this morning in heavy trading following the release of strong September sales. Double-digit same-store sales gains in all three key divisions offer further indication that the would-be fashion dictator is serious about getting back on track from a fashion and marketing perspective.
LouAnn Lofton gave the company a high five for its second-quarter performance in August. This has proven important in a slow economy -- particularly for mass-market retailers like Gap, as customers have focused on staple items, hurting companies that over-marketed fashion items. (This clearly impacted Gap Kids competitor The Children's Place (NYSE:PLCE), another company we examined today.)
When considering Gap, however, it pays to revisit the arguments cited when our Rule Maker Portfolio made the painful decision to sell the stock. Particularly convincing was a deteriorating Flow Ratio, which reflects how well a company manages its working capital.
Ideally, the Flow Ratio comes in below 1.0, meaning the company is delaying more of its own payments than it carries in inventory and unpaid bills. (More on the "Flowie" and how it's calculated is available in our archive.) When the Rule Maker sold, Gap had consistently come in above the cutoff of 1.25 for several quarters running.
Things have looked much better over the last six quarters, according to data from Multex Investor and Gap's SEC filings. The Flow Ratio has come in at 1.27 or better in all six, generally coming in near -- and in one case, even below -- the "magic" 1.0.
That's another good sign from this company on the mend -- and another reason investors should look forward to the balance sheet data in the second-quarter 10Q, as well as the company's third-quarter earnings.
Dave Marino-Nachison can be reached at [email protected]
