Oh, Gap (NYSE:GPS), you've traveled from the heights of ubiquity to become a fashion casualty. You could have no better champion than longtime Fool Rick Munarriz to defend your faded honor, but the nature of your financial flops is the equivalent of handing him a dull sword with which to parry.
Gap's been struggling for quite some time, but there are still plenty of Gap defenders around -- the stock's recommended by both Motley Fool Inside Value and Motley Fool Stock Advisor. I'm not one of those defenders. Gap bull cases generally center on its balance sheet and brand, but I'd argue that even those are fading positives at this point. Gap has admitted that it has done too much cost-cutting over recent years, sacrificing frills and thrills in its product line. Meanwhile, if the top line continues to suffer, its cash reserves are sure to follow suit.
Its brand is my principal concern -- I'd argue that it has simply been struggling to regain relevance for too long now. Is Gap's brand is getting a bit tattered, like last season's denim?
Is the brand in demand?
My Foolish colleague Seth Jayson was right on the money with his critique of Gap's last quarter. Indeed, in one of my favorite S.J. articles, he pretty much nailed the idea that Gap's got an identity crisis, which has been painfully clear to investors for quite some time.
Having taken a peek into Gap's conference call from last quarter, I'm hardly convinced that Gap's much closer to exciting customers again, despite management's acknowledgement that it's an urgent matter at this point. There seemed to be a great emphasis on marketing, remodeling, and window-dressing, and while I'll acknowledge that many Gap stores probably need a coat of paint and then some (I've seen a few that looked downright slovenly), I was concerned that the call's actual fashion talk seemed a little bland.
"Key big ideas" at top-of-the-line Banana Republic? "Classic white shirts and chinos." At price-conscious Old Navy? "Stripes and naturals." And for Gap, the flagship, the name that started it all? It's "t-shirts, hoodies, great clean bottoms, and denim." In fact, Gap said it will "reestablish authority" in those items. Aside from snickering a bit at "great clean bottoms," I couldn't get excited about t-shirts, hoodies, bottoms, and denim. Where's the excitement, people? Even more important, where's the differentiator?
My read was that Gap's still running in circles. What among those choices isn't provided elsewhere? Everyone from Abercrombie & Fitch (NYSE:ANF) to American Eagle Outfitters (NASDAQ:AEOS) to J. Crew offers such wares. How much can Gap charge for T-shirts and hoodies when its brand isn't even the hottest one around anymore? I also couldn't help thinking about maverick company American Apparel, which has made a name for itself by selling reasonably priced, sweatshop-free T-shirts, hoodies, and other separates to hipster youth. (That sounds like a Gap attack if I ever heard one.) High-priced denim has been all the rage lately, but Gap's denim no longer has the cachet of brands like True Religion (NASDAQ:TRLG) or Citizens for Humanity, no matter what price you slap on it. Given Gap's frequent clearance sales to move sluggish merchandise, one might wonder if the supposedly almighty Gap brand -- lauded by so many proponents despite the ongoing difficulties -- is starting to get a bargain-basement tarnish. Everyone may know the name "Gap," but it's not doing so hot when shoppers aren't too psyched to go unless they know they're going to get a deep discount.
Hold on to your hoodie
Investors were chilled when Urban Outfitters (NASDAQ:URBN) announced a soft start to 2006, describing a coming "tectonic shift" in women's fashion in its last conference call. I have to say, given that Urban Outfitters has been successful through good times and bad, I can't help wondering how well Gap will weather such trend turbulence when its finger has not been on the pulse of fashion.
Rick, need I say more? Shareholders are surely unhappy with the performance exhibited by CEO Paul Pressler, a former Disney (NYSE:DIS) executive who was brought in to execute the turnaround. There have been rumblings that he should step down. There's also the rapid defection of top management at Gap. Maybe that's a cleanup Gap sorely needs in order to get a fresh start, but then again, it may only create more sloppiness. How can you keep your eye on fashion when some of your most seasoned executives have their eyes on the door?
Given the myriad problems that face Gap, the balance sheet argument loses luster. Gap may have posted $951 million in trailing-twelve-month free cash flow last quarter, but that was actually 19.3% lower than last year. Sales stunk, and margins continue to fall. Its dividend and share buybacks sweeten the deal for investors -- but is that enough of a consolation prize if this company can't drum up growth? I don't think so.
Sorry, Rick. Gap's not back yet, and given just how long it's been struggling, I can't help but wonder if it will ever regain even the shadow of its former fashion glory. Investors, beware.
Gap is recommended by both Motley Fool Inside Value and Motley Fool Stock Advisor .
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Alyce Lomax owns shares of Urban Outfitters, but holds no financial position in any of the other companies mentioned. The Fool has a disclosure policy.
