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Five Reasons To Never Own Gap

By Will Ashworth

Tickers in this Article: GPS, BKE, JCG, GES

The last straw for me came when The Gap (NYSE:GPS) announced its same store sales for March. Like the sales for many retailers, they were negative. It's not been great these last few months as anyone who works in retail can attest. That much I get. I understand that many retailers are suffering; we're all suffering. But come on, The Gap sounds like a broken record whose rallying cry continues to be "just wait until next month when we'll really wow you." What's the old saying? Fool me once, shame on you; fool me twice, shame on me. Is there a saying for fool me repeatedly until I'm beat into submission? There should be. How does this company continue to remain relevant when it's as bad as the Chicago Cubs, maybe worse?

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For the first and last time, I ask Gap supporters to lay down your arms and admit defeat. The battle is lost. Return to your families and live to enjoy another retailer. Think with your heads, not your hearts. If these five reasons don't convince you to move on, nothing will. At least I know I'll have given it my best shot.

Reason No.1
The March same-store sales report put the company on a crash course with a 25th negative quarter of comparable store sales since the beginning of fiscal 2000. That's 25 out of 33 quarters. If you still see the glass half-full, you must not be drinking quickly enough. That's simply unforgivable. Consider that several of those years were prosperous ones for the economy.

Reason No.2
Old Navy's, a Gap subsidiary, same-store sales were down 27% in March. That's two-seven. Why bother even opening the doors? I know what you're going to say. The sales it did make were at full-price. You're right; it's not a problem until you admit it is.

Reason No.3
Rather than management trying to fix the original Gap stores, they seem to be grasping at straws. Since they have so few people visiting, the best solution they've come up with is to introduce a premium Banana Republic (subsidiary of Gap) called Monogram, where you're hosed extra special. Apparently the plan is: if you can't get more people into your stores, at least figure out how to charge them more.

Reason No.4
Great news is too little and coming too late. Gap management reaffirmed fiscal 2008 earnings somewhere between $1.20-1.27 per share. That little morsel came at the end of the same press release detailing the March same-store sales debacle. I guess we should bark our approval.

Reason No.5
In fiscal 2000, Gap made $1.13 billion in net income, from $11.63 billion in sales for a net margin of 9.7%. In fiscal 2008, based on the guidance above, it should generate net income of $933.54 million from $15.76 billion in sales for a net margin of 5.9%. For simplicity, I assumed total revenue would be the same as in fiscal 2007. During this eight-and-a-quarter year period, the stock went from $51.69 on February 1, 2000; down to a low of $9.42 on September 30, 2002, finally coming to a rest in the high teens where it sits today. Why do investors continue to reward it for mediocrity? Nostalgia makes you do crazy things I guess. However, you can't bring back the past. (For more on this analysis, check out Do-It-Yourself Analyst Predictions.)

Bottom Line
Friends will tell you when you're acting silly or shortsighted. True, we don't even know each other, but please take this piece of advice, run as fast as you can away from The Gap and never look back. Those of you wise beyond your years should run straight into the arms of one of these three competing companies: Buckle (NYSE:BKE), J. Crew Group (NYSE:JCG) or Guess (NYSE:GES). You won't regret it.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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