Gap’s ‘Less-Bad’ News Not All Bad (GPS)

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Gap, Inc. (NYSE: GPS) is seeing a 5% rise after the ailing casual apparel retailer reported earnings.  The company posted $0.25 EPS with a 5% revenue drop to $4.67 Billion, and First Call estimate was $0.35 EPS on $4.7 Billion in revenues.  For fiscal targets a year out it gave a range of $1.20 to $1.27 EPS, and First Call has estimates of $1.23 EPS.  It looks like the worst part of plummeting earnings may be behind the company, even if the news is not yet great.

Perhaps the driving force rather than the real earnings results was more of the company’s keeping costs down, a dividend hike, and a share buyback.  Gap gave word it would repurchase up to another $1 Billion, with about 16% of that coming from Fisher founding family members.  Its annual dividend was also being raised from $0.32 to $0.34.

We still think that the company’s best shot here is to divest Old Navy as its worst image brand.  We have noted how it needs to get rid of this pig.  The company’s market cap at the close today was $14.6 Billion, and that is one of the few initiatives it can take that would actually make an immediate dent. 

Shares are up 5% at almost $20.50 on relief that things are no longer looking like they just continue to get worse and worse and worse.  This one still has a lot to prove before "it’s back" as far as Wall Street and main Street are concerned.  The 52-week trading range is $15.20 to $22.02, and the highs in the late-1990’s and early in 2000 were north of $40.00.

Jon C. Ogg
February 28, 2008