Stock Watch
Gap: Out of Fashion
After a disappointing sales report, is the Gap's recovery over?
October 13, 2003
Fleece may be in fashion for fall, but shelves stuffed with it aren't enough to protect the Gap (GPS) from the chill wind of Wall Street expectations. After nearly a year of steady gains, shares plunged 13% in a single September day when the Gap reported the previous month's sales fell shy of forecasts.
Despite the stumble, sales in the first eight months of 2003 were 13% higher than the same period in 2002. Analysts attribute the improvement to a popular advertising campaign featuring Madonna and rapper Missy Elliott, and conservative fashion tastes that favor a fall lineup built around corduroys and cargo pants. Gap's stock, which had traded for $9 in the fall of 2002, reached $21 before the recent setback.
But investors find the sales shortfall worrisome for reasons unrelated to fashion. It happened a year after the Gap began a turnaround, and may signal tougher times ahead. "The lowest-hanging fruit will have been picked," says analyst Adrienne Tennant, of Wedbush Morgan Securities. "The next level of improvement needs to be shown." Tennant says the Gap's turnaround remains on track but, she adds, it's a long-term project. She rates the Gap a hold but would "scoop up" more shares at $15 or lower.
The stock currently trades at 20 times 2004 consensus earnings estimates of 97 cents per share.
--David Landis
