Year-to-date, things have gone a bit better for the erstwhile trendy clothier. Earnings have far outpaced sales gains of just 4%, increasing 14% over the past three quarters and currently standing at $0.81 per diluted share. Annualizing that figure by using a run rate calculation would give Gap $1.08 in earnings for full-year 2004 and a price-to-earnings ratio of 21. That equals the P/E sported by competitorAbercrombie & Fitch
In further support of an investment thesis for Gap, the company argues in its press release that it has strengthened its balance sheet and is maximizing shareholder returns with debt paydowns and share buybacks. And it's true that over the past three months, Gap has paid off $397 million in debt ($122 million of that ahead of schedule) and repurchased about 17 million shares at an average price of just under $20 per share. What's more, Gap is less than halfway through its currently authorized $750 million share-repurchase plan and still has net cash (cash and equivalents minus long-term debt) of $1.8 billion -- plenty to complete this buyback plan and start one or two more when it's finished.
But unfortunately, this Fool has to take issue with Gap's assertion that the buybacks are adding shareholder value. Rather, as we've seen with companies such as Symantec
Foolish minds differ on Gap, as on many other companies. In fact, the company was picked not long ago as a recommendation for Motley Fool Stock Advisor . Give the newsletter's April 2004 issue a read and see why Fool co-founder Tom Gardner thinks Gap's a steal of a deal, stock dilution or no. You can subscribe today with the benefit of a six-month money-back guarantee if you're not totally happy.
Fool contributor Rich Smith owns no shares in any company mentioned in this article.