When Motley Fool Stock Advisor recommended Gap (NYSE:GPS) in 2004, it cited the company's finally getting back on track after more than two years of declining same-store sales. Unfortunately, it seems Gap could not keep the momentum going.
Last night, the company served up second-quarter results that were disappointing. Same-store sales, the barometer used in retail to determine how a company is performing, declined 3%. Yikes. Sales were flat (falling just a hair). Net income did not disappoint, rising 39% with a little help from a one-time reversal of a sublease loss reserve.
CEO Paul Pressler laid the blame at the feet of "summer product" but then went on to say that August results to date are so weak that the company is going to drop its fiscal 2005 earnings forecast to a measly $1.30 to $1.34 a share from $1.44 to $1.48 a share. That forecast is doubly troubling because of this quarter's strong net income.
The trouble at Gap runs through all divisions. North America results for The Gap and Old Navy showed a 4% drop in same-store sales; Banana Republic was the bright spot at a negative 3%. The only increase was in the international division, up a mere 1%.
Sales are not weak everywhere. Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NASDAQ:AEOS) are reporting same-store sales growth in excess of 20%. Yet there are other retailers, such as Aeropostale (NYSE:ARO), with negative same-store sale numbers, too.
And that is the problem. Gap and its subsidiaries were hot years ago. Fashions have changed, and the customers have moved up and down the mall to other retailers.
On the positive side, the company still has more cash than debt and expects more than $1 billion in free cash flow for this fiscal year. Management is using a lot of that cash for repurchasing stock, which should help boost earnings per share. In the last quarter alone, more than $100 million was spent on repurchases and an additional $500 million plan was authorized. Analysts expect earnings per share to grow 12.5% per year for the next five years.
The stock is trading for 12.6 times expected 2006 earnings (that fiscal year will end in January 2007). With faster-growing chains like American Eagle and Abercrombie selling for 13.2 and 15.3 times forward earnings, respectively, it is unlikely that Gap stock will make any move up until same-store sales start to rise.
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Fool contributor W.D. Crotty, a Banana Republic shopper, owns shares in Disney and was happy that Mr. Pressler left Disney. Click here to see T he Motley Fool's disclosure policy.
