Alyce is worried about Gap (NYSE:GPS) losing its relevance. Keep in mind that Gap's same-store sales have fallen in just one of the past three fiscal years. Is the situation that dire? The retailer is still a profitable free cash flow machine. The chain will evolve. It always has. The original concept that Don and Doris Fisher opened in 1969 in San Francisco, pitching "Levis, Records & Tapes," will keep changing -- just as it has over the past 37 years.
I'm not alone here. Motley Fool Inside Value's Philip Durell and Motley Fool Stock Advisor's Tom Gardner have both recommended Gap to their subscribers. When two proven market-thumpers fall on the same side of the fence, I pay attention. Tom is clearly pretty excited about this space; five of his past seven recommendations have been retailers, including bebe stores (NASDAQ:BEBE) and Pacific Sunwear (NASDAQ:PSUN).
Is Gap perfect? No, but financially steady retailers like Gap can be afforded these blips. Whether it's the failed swimwear experiment at Old Navy or Gap's West Side Story ad fiasco, Gap will bounce back. Patient investors just happen to have a historically cheap price and a generous dividend to keep them company.
Alyce feels that an apparel company like True Religion (NASDAQ:TRLG) is making Gap less relevant, but I believe that if a company can sell a pair of branded jeans for more than $200, Gap will similarly come to reap the benefits of the revival in designer denim. Gap can play the lucrative style-conscious card later; right now, it's just giving people the basics they want. With more than 3,000 stores, Gap has the buying power that its mall-rat rivals never will. How many of the hot chains will clear more than the $900-million-plus in free cash flow that Gap will pocket this year?
Gap is in the right place -- retail. It's there at the right time, as the improving economy is loading folks up with disposable income and shoppers are willing to spend more on clothes. Gap just doesn't know what to wear at the moment.
That's fine. Fickle fashion is a temporary problem that can be fixed with a sharp buying decision or two. The healthy net profit margins that Gap is still producing are comforting. Sorry, Alyce, I'll have to side with Philip and Tom on this one.
Think you're done with the Duel? You're not! Go back and read the other three arguments, then vote for a winner.
Longtime Fool contributor Rick Munarriz thinks that the company should combine its three non-Gap concepts into one -- Old Banana Towne. He doesn't own shares in any company mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
