We don’t usually like to bash a brand nor do we like to bash people.  We noted prior management changes were not enough, and this is no different. The problems at Gap and at OLD NAVY were not caused by Dawn Robertson and the new CEO Glenn Murphy has no fault here either.  We panned Paul Pressler as one of our first CEO’s THAT NEED TO GO, and all of these officers are inheriting what his regime left behind.  It is very unlikely that the OLD NAVY brand will miss her after 16 months.  For that matter, she probably won’t miss it either. 

If any president in corporate America wants to run any brand out there, the chances that it would be OLD NAVY might be as little as 1 in 1000.  This is the cheapie brand for Gap.  Glenn Murphy should take this as an opportunity here.  He is still a new CEO there and frankly he could get away with anything short of a capital crime if it would fix a company and fix a brand.  Gap didn’t do well with its more upscale womens fashion line Forth & Towne so it closed it.  But OLD NAVY is so cheap that acts as a mental drag to even a casual apparel store like Gap and Banana Republic. 

We doubt seriously that Gap would jettison its brands or break itself up.  But the one brand that could make a difference is for it to unload its cheapie brand.  It could go out and strike new design contracts for say the 2010 product lines and run as an independent company.  Jim Cramer last year used to say "GAP WILL BE TAKEN PRIVATE IN A YEAR!" before the private equity meltdown happened.  The problem is that Gap’s market cap is over $14 Billion as of now, and private equity firms are having a hard time borrowing even a couple billion dollars.  It has also been a dead stock and longer-term shareholders who had gotten used to making 10% and 20% in share appreciation year after year may want more than just an at-market buyout.  We have had this up for review in the Special Situations letter, but it has yet to make the cut.

OLD NAVY in North America generated a same store sales drop of -8% this January, and -10% in January 2007.  The problem isn’t the economy, it’s that this OLD NAVY brand is complete garbage and barely appeals to the lowest rungs of society.  This brand is so bad that it is extremely difficult not to address it with offensive language.  Go get your new president, but make it a challenge that a CEO or president would actually want.  The job ad could read "Crummy company about to spun-off, needs brand improvement, major stock options package, needs visionary."

Gap was already weak before the September 11, 2001 put another nail in its coffin.  While shares did recover from those lows, the reality is that Gap stock has been dead money for almost 5-years.  We noted long ago about needing a headcount cut and brand revamping.  This would even allow the company to stop wasting its cash on share buybacks when it needs the cash for its brand.  There is an opportunity to jettison its cheapest brand here, and it might actually make a difference to shareholders. 

We are looking mostly at the North American stores for comparison here.  As of November 3, 2007, there were 1,188 domestic and 90 Canadian GAP brand stores.  There were 997 domestic and 65 Canadian OLD NAVY brand stores.  When you consider that BANANA REPUBLIC had 519 location in the U.S. and 30 in Canada, you can see why we would note a potential powerful "unlocking value" here.

Jon C. Ogg
February 19, 2008

GUIDANCE: The company revised its guidance for fiscal year 2007 diluted earnings per share on a GAAP basis to $0.83 to $0.88 from its previous guidance of $0.76 to $0.86. The company also revised its guidance for fiscal year 2007 diluted earnings per share, excluding expenses associated with the discontinued operation of Forth & Towne and the company’s cost reduction initiatives, to $0.90 to $0.95, compared to its previous guidance of $0.80 to $0.90.

BUYBACKS, PLUS MORE BUYBACKS: During the second quarter, the company repurchased 11 million shares for $200 million, thereby completing a $750 million share repurchase authorization which was announced in August 2006.  the company announced that its board of directors authorized an additional $1.5 billion share repurchase program, and that it has entered into purchase agreements with individual members of the Fisher family whose ownership represents approximately 17 percent of the company’s outstanding shares. The company expects that about $250 million (approximately 17 percent) of the $1.5 billion share repurchase program will be purchased from these Fisher family members.

MARGIN, TAX RATES, & GROWTH: The effective tax rate was 37 percent for the second quarter of 2007. The company continues to expect the effective tax rate will be about 39 percent for full year 2007. Gross margin of 34.3 percent increased 1.3 points in the second quarter compared to the prior year. Operating margin for the second quarter was 6.1 percent. The company reaffirmed that it expects operating margin for fiscal year 2007 to be in the high single-digits.  For the first half of fiscal year 2007, the company opened 73 store locations, closed 61 store locations and square footage increased 1 percent. The company reaffirmed that it expects to open 30 store locations on a net basis for fiscal year 2007. This includes about 230 store openings, weighted toward Old Navy, and about 200 closures, weighted toward Gap brand.

This is Glenn Murphy’s first quarterly report as CEO.  Gap shares are up almost 3% to $17.90 in after-hours trading and that is after closing down 0.5% at $17.40 in regular trading.

Jon C. Ogg
August 23, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

How many quarters of ‘less bad’ can there be?  It disclosed -7% same store sales for July, although its total sales were up 1% on stronger international sales of +11% total and +3% on a comparable store basis.  We already have seen the preliminary retail sales numbers with total company sales being $3.69 Billion.

Analysts still seem mixed to positive on the company, although it looks like average price target is still north of $21.00.  Options traders appear to be braced for a move of up to 4% in either direction.

Gap’s chart is only so-so after it put in a new year low earlier this month during the market malaise.  Shares are actually up almost 15% since then.  It seems that in a tighter credit environment that there are stillmany large pending deals that are not yet considered done and completed, so the hopes for buying an ailing retailer with a $14 Billion market cap are less than they were earlier this year.  We’ll have to see if Glenn Murphy, its new CEO, is going to be able to make a difference to what has turned into a perpetually ailed stock that has defined the term ‘dead money’ for about 4 years.

Jon C. Ogg
August 23, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.