Has Gap Finally Found Redemption? (GPS)

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If you have read us for very long, you will know how critical we have been of Gap, Inc. (NYSE: GPS).  The company just couldn’t get it right.  This was a fairly tale growth story of the 1990’s, but then its size, its off-shoots, and its own direction did not migrate along with Joe Public.  But sometimes enough is enough.  Gap may finally be getting on the right track.

After the close yesterday, Gap posted earnings at $0.35 EPS on revenueof $246 million.  While other retailers are stinking up a storm, thiscompares to earnings of $0.30 EPS and $238 million last year.  Whilesales did drop over 7% to $3.56 billion, analysts’ estimates from ThomsonReuters (First Call) were only $0.34 EPS and $3.57 billion.

The company said that it still expects earnings of$1.30 to $1.35 per share for the full year year, and this compares toanalysts’ estimates of $1.33 per share.

Gap is under a new CEO named Glenn Murphy, and his efforts at managinginventory, cutting costs, closing stores and consolidating Gap formatstores appears to be paying off.  This is on top of same store sales inthe quarter coming in at -12%, which is worse than the -5% last year inthe same period.

Murphy did give the same sort of caution ahead by saying that thefourth quarter is going to be a challenging one.  He also said that hedoes not expect any improvement in the economy for at least six months.

Old Navy continues to be the eye-sore here.  Its same store sales weredown at -18% for the quarter.  The Gap brand stores posted same storesales of -7% in North America and the Banana Republic brand saw a dropof -11% as it is a higher-end purchase.

There is one thing that the namesake Gap brand and Old Navy have incommon, which is not the case at the upscale Banana Republic.  They arelow-priced retailers.  Joe Public is pinching pennies left and right,and this may be playing into the company’s favor.   

Murphy is lowering inventories to compensate for the environment and heis still cutting down real estate holdings.  The company is likelystill a ways off from posting positive same store sales gains, but thegood news is that the bar is being set lower and lower.  That will actas a springboard when he does (if he does) get the ship turned.  Whatis amazing is that despite all of the drops in same store sales on anendless basis and despite all of its problems, the company hascontinued to be profitable.

We still believe that the company needs to jettison Old Navy off toshareholders.  Right now that brand should be called Old Lamie.  if thecompany can change its image and keep its price point, it couldactually have a solid value offering while the world is in the poorhouse.

Shares closed at $9.51 yesterday and the absolute intra-day low is$9.41 over the last year (also yesterday).  This stock has only seenthe sub-$10 level yesterday and it was above $19.00 in September. 

Shares are up 13% at $10.75 right before the open.  Even at thismorning’s gap-up price, Gap now trades at about 8.3-times projectedearnings.  It gets easy to keep ringing the same tune at troubledcompanies calling.  Some companies do ultimately make a turn, and it isimportant for critics to have a moment of clarity and recognize thatthings may be changing.  As long as the market tank-o-la doesn’t keepcoming over and over, this one may finally be worth a look. 

For the time being we are actually going to keep this one on a positive watch list.  Stay tuned.

Jon C. Ogg
November 21, 2008