GPS: Avoid Gap Until Sales Pick Up

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Shares of apparel retailer Gap (GPS) are down this morning after the clothing retailer reported August same-store sales results. However, with the stock’s generous dividend and an ex-dividend date coming up in just a few weeks, is now a good time to pick up GPS on the cheap?

Gap Overview

GPS GapGap has come a long way since opening its first store in 1969, when a pair of jeans cost around $7. Over the years, the Gap umbrella has grown to cover hot retail names such as Banana Republic, Old Navy and women’s active-wear retailer Athleta.

Last year, the company brought in $1.3 billion in net income on $16.2 billion in revenue. Yield seekers may like to know that GPS pays a 2.2% dividend yield. However, GPS is a textbook case of why a generous dividend isn’t everything. I’ll discuss why next.

Retail Rundown

Gap’s same-store sales results for August are weighing down its stock price. Compared with August 2013, sales at stores open a year or longer fell 2%. Analysts were shocked as they predicted a 1.7% increase. Further, same-store sales at all Gap-brand stores plunged 6%. Analysts expected Gap store sales to decline 0.4%. Same-store sales at Banana Republic also declined 2%, compared with the consensus estimate of a 1.1% increase.

Only Old Navy stores posted a 2% gain in same-store sales, but this still underperformed analysts’ estimates of 3.6% growth. Now that we know that Gap’s August sales were weaker than anticipated, we’ll likely see a round of downward revisions to this quarter’s earnings-per-share estimates.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the last 12 months, Gap has fluctuated between a “hold” and “sell” rating.

Currently, GPS barely squeaks by with a “C” rating for its Quantitative Grade, which measures its risk-to-return potential, and a “C” rating for its Fundamental Grade. On the fundamentals side, GPS failed on two — sales growth and earnings growth — of the eight metrics I graded it on. GPS barely passed with “Cs” on four other metrics: operating margin growth, earnings momentum, earnings surprises and analyst earnings revisions.

The only bright spots on Gap balance sheet is its “B” for cash flow and “A” for return on equity. Gap has its work cut out for it before it can earn a “buy” recommendation.

Bottom Line

As of this posting, September 5, 2014, Portfolio Grader ranks Gap as a “C-rated hold.”

Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip GrowthEmerging GrowthUltimate GrowthFamily Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.


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