Another quarter, another round of excuses from Gap
The Fool by Numbers tells enough of the story. Sales down 5%. Same store sales down more like 9%. No surprise then that profits were down too, with net earnings dropping 16.8% and earnings per share down 11% to $0.28 per stub.
If you listened in on the conference call or checked out the transcript, it will look familiar. Very familiar. Same kinds of promises about the turnaround that's on the way. Lots of blabber about a big new TV advertising campaign to begin July 20. (There were no Gap ads on the tube last quarter. Honestly, did any of you miss them?) But it all sounds like catch-up ball. Denim and hoodies? Dudes, you have been seriously outmaneuvered on that turf. You think you can sneak your way back by following the leaders like Abercrombie & Fitch
Listen, folks, Gap's price-to-earnings (P/E) ratio of 15 might look tempting, but there are companies out there actually growing earnings that trade at similar multiples. Consider that the two abovementioned competitors pounding the tar out of Gap trade at earnings multiples of just less than 17. Pacific Sunwear
How much do you want to spend on a proven loser like Gap in hopes of a turnaround? Do you believe Gap can actually slug it out with like likes of Ann Taylor
If you do, that's perfectly fine. But wait for a better price. A real value. By my cipherin', Gap needs to enlarge the old free cash flow (FCF) at a rate of 10% a year for the next five years to live up to today's share price. The actual direction of FCF has been decidedly to the downside for three years. Why do the shares float so nicely in this range? I think what you see today is a persistent hope bubble, Gap investors being too much like Gap's fashions: mired a few years back in time. In my opinion, if (I say when) Gap continues its trend and whiffs this summer, you may finally see that price go poof.
Seth Jayson is part of the extended family at Motley Fool Inside Value , where contrary opinions are part of the package. A free trial will get you access to current recommendations, as well a lively discussion among savvy stock pickers.
Gap and Pacific Sunwear are Motley Fool Stock Advisor recommendations.