The march of retailers reporting earnings goes on. Next up, the once-hip, now-just-venerable Gap (NYSE:GPS) announces its third-quarter earnings news Thursday evening.

What analysts say:

  • Buy, sell, or waffle? An even two dozen analysts brave the Gap, which scores eight buys, 13 holds, and a trio of sells.
  • Revenues. On average, they're looking for flat sales of $3.86 billion.
  • Earnings. Profits are predicted to fall 8% to $0.22 per share.

What management says:
It's been less than two weeks since Gap provided investors its preliminary guidance on Thursday's numbers -- hardly enough time for things to have changed much. Therefore, don't add too much salt when digesting the following.

Sales for the quarter were flat against last year at $3.86 billion, while same-store sales continued to weaken, down 5% year over year. The situation got even worse in October, with total sales declining 3% and comps in particular down 7%. The firm still thinks profits will come in at $0.21 to $0.23 per share, but one penny of that comes from a tax-rate adjustment.

What management does:
Gap's long, slow slide continues. Rolling gross margins have been declining over the entire 18 months reflected below. Same goes for the rolling operating results, and net margins have been falling nearly as long. Peering deeper into the income statement, we can see why: As sales declined 3% year to date, the cost of goods sold rose 2%, squeezing the gross margin. Compounding the injury, operating costs rose 4%, further compressing the operating and net margins.

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

38.7

38.4

37.5

36.6

36.4

35.4

Op.

12.2

12.3

11.6

10.9

10.5

8.9

Net

7.0

7.4

7.2

6.9

6.7

5.8
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Gap is one of just two companies endorsed by multiple Fool newsletter advisors. Like co-honoree Dell, the retailer has been picked out of the haystack at both Inside Value and Stock Advisor. Unlike Dell, it got the nod at the latter publication from value hound Tom Gardner.

Philip Durell at Inside Value likes that last quarter, "Gap international SSS posted an 11% gain, online sales jumped 27%, and Banana Republic [same-store sales] seem to indicate a relative improvement." He's less impressed with the firm's "significant discounting," necessitated by "missteps relating to storefronts and merchandising," however.

For his part, Tom continues to look askance at Gap's declining same-store sales numbers, and cautions that the stock's recent rebound appears to be due more to its status as a "beaten into the ground" stock and the recent rise in the retail sector as a whole. Gap's rise from the sub-$17 basement since September should not be taken as proof of any improvement in operations. Remember to keep the business separate from the stock in your mind.

To get the Fool skinny on what our advisors have to say about Gap, you can take free trials of each publication. Yes, free. Just click here to claim a trial to Inside Value, and here to give Stock Advisor a whirl.

Competitors:

  • Aeropostale (NYSE:ARO)
  • American Eagle Outfitters (NASDAQ:AEOS)
  • Chico's FAS (NYSE:CHS)
  • Federated Department Stores (NYSE:FD)
  • New York & Co. (NYSE:NWY)

American Eagle is also a Stock Advisor selection, while New York & Co. is a Motley Fool Hidden Gems pick.

Fool contributor Rich Smith does not own shares of any company named above.