Gap Inc: Buy GPS Stock? Show Me the Sales First!

Prolonged across-the-board weakness can't mean too many other things

By James Brumley, InvestorPlace Feature Writer

When the best thing a retailer can say about a particular month’s sales is that the decline wasn’t as big as the dip from the same month a year earlier, that’s a sure sign of trouble. Well, Gap Inc (GPS) is in hot water.

Gap Inc: Buy GPS Stock? Show Me the Sales First!For 12 straight months now, iconic retailer Gap — which also operates Old Navy and Banana Republic — has posted a year-over-year lull in the monthly top line, reporting a 6% tumble of last month’s total revenue.

And it’s not like there were any bright spots either. All three units reported lower year-over-year revenue for March. Banana Republic was the biggest offender with a 14% sales slide, but Gap Global’s 3% sales drop was still disappointing. Old Navy found itself somewhere in between with a 6% year-over-year decline in sales.

This recent weakness, of course, sets up (even more) future trouble. It may finally be time for the cavalry to come riding in.

Gap Is Failing

As much as GPS investors would love to blame the weather and Easter in March for Gap’s dismal numbers, that excuse isn’t going to fly. The Thomson Reuters Same Stores Sales Index indicated only a 0.1% same-store sales drop in March for the 80 stores that make up the index.

The picture worsens when only apparel retailers are considered. Taking Gap’s results out of the equation, apparel retailers reported an average of a 1.6% improvement in March’s same-store sales.

That said, drilling down into the “teen apparel” category specifically — where Gap at least partially lies — we saw a big 10.3% dip in March’s sales thanks to awful numbers from Buckle Inc (BKE) and Zumiez Inc. (ZUMZ). In fact, Zumiez and The Buckle have been almost as consistently disappointing as Gap has over the past several months in terms of year-over-year comparisons, suggesting the impasse may be at least partially a demographic issue as it as a company-specific one.

Nevertheless, relatively new Gap CEO Art Peck hasn’t done GPS shareholders any real favors since taking the helm in February of last year.

The initial plan seemed sound — Peck was going to institute a so-called “fast fashion” feel for Gap and Banana Republic stores, turning over a high volume of lower-end merchandise much like Old Navy already does. Problem is, it didn’t work … at least it hasn’t yet. And, in light of the fact that not even Old Navy has put up any highly impressive numbers of late, again, perhaps it’s not a company-specific issue, but rather a flawed business model getting in the way of success.

Or, perhaps the remaining Gap loyalists didn’t accept the change, and/or Gap just didn’t do fast fashion very well.

Bottom Line for GPS Stock

The fashion and marketing failure will certainly translate into fiscal failure, even more so than it already has.

Something else, the March sales press release and pre-recorded conference call mentioned ending the previous month with more inventory than expected. This typically means more than the usual amount of discounted merchandise in April — crimping margins — to make room for the next wave of spring/summer goods. Ergo, the current quarter’s bottom line will be even smaller than initially thought. That’s the bulk of the reason Gap stock is in the red to the tune of 12% today.

Gap (GPS) Revenue and Earnings Trend
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Then again, GPS shareholders are no stranger to disappointing results. As the revenue and earnings chart shows, Gap has been losing ground since the first quarter of last year.

Next year is projected to be marginally better than this year’s lackluster outlook, but bear in mind that the further out the projection is, the more likely it is to be reeled in.

Gap was and still is an iconic name, as are Banana Republic and Old Navy. All are in need of a serious overhaul. Peck might not be the guy to make it happen.

Whoever ends up leading the charge, though, Gap stock has now become a “show me” stock … meaning investors may want to require concrete evidence that better days are on the way before wading in.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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