The news is in: There's no quick fix for Gap (NYSE:GPS), although that probably isn't news to many of us.
Gap's fourth-quarter earnings report showed that times are still tough for the retailer. It may have been able to increase sales by a modest 2.3% during the quarter, but earnings fell 35% to $219 million, or $0.27 per share.
Here's our related Fool by Numbers piece, where you can see Gap's fourth-quarter figures in detail; Gap's margins shrank, and inventory rose by 5.9%, outpacing the increase in sales. Gap did decrease its debt by 63.4% to $188 million, but cash decreased by 13.1% to $2.64 billion and free cash flow fell 28.7% to $678 million.
That's a lot of negativity, to be sure, but it's not surprising; although Gap's comps did thaw in January, the retailer still had a lot of work to do to get things back on track.
Although it wasn't long ago that investors pumped up the stock on buyout speculation (that might have constituted some kind of a "quick fix," I suppose), my colleague Nathan Parmelee suggested that, over the long haul, it would be better for shareholders if Gap simply repaired its business and continued as a public company. And that does appear to be the plan under interim CEO Bob Fisher.
In Gap's conference call, Fisher reiterated what some of us already believed: There's no easy solution here. However, Gap management knows the challenge at hand is to repair its core brands and find its specific customer target. (Although Gap's admitting the 18-to-35 demographic is too broad, it's still trying to figure out where its customer falls.) Another interesting nugget from the conference call was that the retailer has become too bureaucratic, given the centralization of processes over the years (which would explain why it has had trouble moving quickly in the changing world of fashion).
The last couple of years have been rough for Gap, and it looks like 2007 won't be much different, what with the company still trying to iron out its strategy. In the conference call, management dubbed 2007 a "transitional" year in terms of stabilizing its business. Indeed, Gap expects earnings in 2007 to be $0.76 to $0.86 per share, including effects of the Forth & Towne closure, with $500 million in free cash flow.
It's long been obvious that Gap's attempt to be everything to everybody has resulted in tarnished brands and a lack of focus. There are plenty of strong retailers that appeal to many different demographics and niches, like American Eagle Outfitters (NASDAQ:AEOS), Abercrombie & Fitch (NYSE:ANF), and Urban Outfitters (NASDAQ:URBN) on the younger side of the spectrum, as well as Ann Taylor (NYSE:ANN) and Talbots (NYSE:TLB) on the more mature side. Gap's decision to close its new Forth & Towne concept is just the tip of the iceberg when it comes to focusing on rejuvenating its core businesses. There's also fast fashion -- think American Apparel, H&M, and Charlotte Russe (NASDAQ:CHIC).
Despite Gap's problems, its shares never seemed to fall to a compelling price -- a forward P/E of 17 and a PEG ratio of 1.50 seems high for a retailer that needs to refocus its energies and implement serious changes. And there's little reason to believe that stronger growth is forthcoming. While Gap may not be unfixable, the road to recovery looks long, with many potholes of uncertainty.
For more on Gap, see the following Foolish articles:
- Gap is skipping Towne.
- Nathan Parmelee pointed out a conundrum for Gap shareholders in January.
- Take a look at 2006 in review for Gap.
Gap has been recommended by Motley Fool Stock Advisor and Motley Fool Inside Value. American Eagle Outfitters is also a Motley Fool Stock Advisor selection.
Alyce Lomax owns shares of Urban Outfitters. The Fool has a disclosure policy that's always fashionable.
