Is everybody still in leather? Is it hip to zip? Or has Gap(NYSE: GPS) taken fashion forward back a step? The retailer announced its same-store sales for February late yesterday afternoon, and investors don't appear to think they're a comfortable fit. The stock was halted at the open this morning, and once trading was resumed, it traded down between 6% and 10% all day.
Same-store sales (or "comp" sales) measure a company's revenues compared to the year before in stores that have been open for more than a year. Many retailers report same-store sales monthly, and many investors look to them as gauges of the health of the company.
Gap's comps for February came in up 4%, compared to a 12% rise the year before. Retail analysts were looking for a 4-6% jump, so while Gap didn't exactly fall short of that mark, not "surprising" the Street on the upside can be temporarily deadly for the share price.
Part of the reason for the disappointment can be found by looking at the breakdown of the numbers by division. Rule Maker Gap Inc. owns and operates Banana Republic and Old Navy, in addition to Baby Gap and Gap Kids divisions. The company also operates Gap stores internationally.
According to the company's press release, the comps number for Gap's domestic division was a negative low-single digit number versus a positive low-single digit number last year. This means that in the stateside Gap stores, fewer jeans and T-shirts were sold this past month than were sold in February of last year. Same-store sales numbers for Banana Republic, Old Navy, and the international division were all positive, with the international division experiencing the most growth.
Gap announced yesterday, too, that the company is losing the head of Banana Republic and its Online Division. Jeanne Jackson, who had been with Gap for five years, resigned and is taking over Wal-Mart's dotcom efforts. No replacement has been named for her, but three senior Banana Republic executives will run the show until a president is named. This, coupled with the modest comps growth, was just enough to convince some investors that Gap's going out like bellbottoms. (Wait, aren't they in again? I just can't keep up.)
Has the long-term story for Gap changed? Last week, the company reported expectation-beating earnings for its fourth quarter of 1999 of $0.47 per share, compared to $0.35 per share for the fourth quarter the year before. According to First Call/Thompson Financial, the Street had expected $0.45. Here, again, though, the story seems to be the comps number. Same-store sales for the quarter rose only 5%, compared to 17% for the quarter the year before. Add to this the fact that Gap added about 500 stores in 1999 to its lineup worldwide, and it looks like Gap is growing its earnings more through new stores than through sales in its existing stores. While this isn't all bad, it's an expensive way to fund growth.
Should investors be shopping for something more fashionable? Not necessarily. However, keeping an eye on those comps as they come out monthly, and noticing where the growth in the company is actually occurring, might not be such a bad idea. Perhaps Gap's stateside stores will stock whatever it is we want (but don't know we want yet) for spring, and we'll see some more promising same-store sales numbers from the company going forward.
For more on Gap, check out The Motley Fool's new individual stock research reports. Analyst Bob Fredeen's report on Gap will be available on March 17 (you can sign up for an e-mail reminder so you won't forget!).
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