Today's Wall Street Journal includes an interesting article on Motley Fool Stock Advisor pick Gap's (NYSE:GPS) plan to remodel its stores. Investors interested in the company and its turnaround efforts should definitely give it a read. Intriguingly, the story notes that sales results have been positive in the stores Gap used to test the remodelling concept. I think a facelift alone won't fix Gap's woes, though; it needs another important change to truly improve its fortunes.
In the last six months, every journalist under the sun has retold the same Gap story: The company has a strong balance sheet, but its sales are in the tank. Perhaps more importantly, there has been no indication yet that sales may recover. Lately, there are even rumblings calling for CEO Paul Pressler to step aside.
Will remodeling the stores help? I think so, because the last few times I've been to The Gap, I've been very disappointed in the quality of the displays and the upkeep of the fitting rooms. It's not much fun to drop trou to try on a pair of new jeans while worrying about dust bunnies nipping at your toes.
As unimpressed as I've been with the look of Gap stores lately, it still seems like there is a fair amount of traffic flowing through the store every time I'm there. The problem my wife and I have -- a problem that many people share, if Gap sales numbers are any indication -- is that the stores, including Banana Republic and Old Navy, don't carry much gotta-have-it merchandise. In the end, all the stores inevitably end up discounting, which works great for me because I'm cheap and not too particular about what I wear. But, if you're a clothing retailer, I'm not your ideal customer. My wife is more to retailers' liking; when she sees attractive clothing, she wants it -- and she's willing to pay full price. She doesn't want to wait for a sale if it means she won't get the desired item in her size. However, she needs to like the item in the first place, and Gap doesn't do it for her.
Let my wife set foot in an American Eagle Outfitters (NASDAQ:AEOS) or an Abercrombie & Fitch (NYSE:ANF) store, however, and it's hard to get her out without making some kind of a purchase. That's the kind of passion Gap needs to inspire in its shoppers. While I believe remodels will help, I also know that they're not cheap, and they're not enough to get Gap back on track. At the end of the day, Gap needs compelling products to grab shoppers' attention.
You might be wondering why a guy who is primarily concerned with picking up jeans and sweaters on the cheap is so interested in Gap. I believe that Gap's shares are also on sale, and that the company's problems are ultimately fixable. As any value investor knows, if you wait for signs that the turnaround is for real, you miss a large part of the gains. If I didn't just purchase a large number of retailers a couple of months ago, when the market's opinion of most retailers was just a smidge higher than the aforementioned dust bunnies, I would probably want to include Gap in my portfolio.
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Nathan Parmelee owns shares in American Eagle Outfitters and has a beneficial interest in Gap shares, but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
