Can Gap Inc. (GPS) turns things around?
Can Gap Inc. (GPS) turns things around?
(via www.investortrip.com)
Gap Inc. comparable store sales growth has fallen again, and direct competition in the casual apparrel industry is gaining large market share. Will Gap turn things around?
Good Analysis on GPS!
Great analysis TJP.
I definitely agree with your view on future sales. Since 2002, they have had single digit revenue growth, with actually negative growth of -1.5% from 2005 to 2006.
However, GPS is still in solid financial condition. With a current ratio of almost 2.5 and free cash flow/sales hovering around 7-8% in the past few years.
Gap was one of the first modern fashion icons, so I don't anticipate them going silently into the night.
Morningstar had this to say..
Gap's GPS second-quarter results were weak, and management reduced its full-year estimates, but given the improved store formats and what we think is a fresher merchandise selection flowing into the Gap stores, we are still hopeful that this company can execute its long-awaited turnaround[...]If we don't see some improvements in the performance of the company's namesake chain by the end of the holiday season, we'd be likely to cut our fair value estimate.
Given that the company reports same-store sales results on a monthly basis, it was no surprise that revenue was flat year over year. Nor was it a surprise that the gross margin fell 440 basis points, and that store costs (which included a significant number of renovations) rose. We were mildly surprised at the magnitude of management's cut in its guidance for free cash flows and earnings, but much of this has to do with ongoing reinvestments in the Gap stores, which are getting a new look to go along with the (we hope) improved merchandise that has begun hitting the stores. However, we think management is taking a more cautious tone toward the second half of the year than it had, and while we think it is genuinely confident about the merchandise, it could take longer for store traffic to pick up after a couple of years of lackluster products.
We're pleased that the company continues to repurchase shares at what we think are significantly undervalued levels, and that the board authorized another $750 million in repurchases earlier in the month. The company continues to generate large amounts of cash, and we think it can continue to pay a dividend, repurchase shares, and invest in the store base.
Gap's problem
Gap's problem and the problem with most fashion companies is that they lack wide moats. They can be hot for a few years, but their styles change and people crave new names and products. Preferences for clothing are fickle and change as quickly as the wind.
The only attractive fashion companies end up being pure brand companies that are completely beaten down. Guess? is a good example of this and so was Burberry.