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Gap, Inc. -- Should You Stay or Go?

By LouAnn Lofton (TMF Lou2)
June 21, 2000

Summary: As Gap, Inc. gets close to a new 52-week low, investors on the Gap discussion board are asking if the company is still a Rule Maker. Retail stocks have had a rough year, and Gap's balance sheet reveals some trouble. Should smart investors sell now, or hang on for the ride?

Gap, Inc. (NYSE: GPS) flirted with a new 52-week low today, trading between $28 and $30 a share. As the stock's price comes close to rivaling what the company's charging for a pair of khaki shorts, concerned shareholders on the Gap discussion board are asking if the retailer is still a Rule Maker. Has the khaki king's place as the undisputed big dog on the porch of fashion been threatened? Or is it just that Gap is suffering at the hands of an overall dreary retail environment along with competitors like Abercrombie & Fitch (NYSE: ANF) ?

Many Fools think the answer is a combination of both. Gap had a less-than stellar first quarter (Q1 for Gap ended April 29, 2000). Same-store sales for the quarter were off 2%. Inventory control and cash management issues are plaguing the company, with the Foolish Flow Ratio puffing up to a bloated 1.41 (above our guideline of 1.25). Inventory levels year-over-year outpaced sales growth, zooming ahead by 38% while sales increased only 20%. The first quarter did have some good news (increased sales and net earnings and gross margins holding steady) but it was mostly overshadowed by the negative. Same-store sales for the first month of Gap's second quarter came in down 2%, so the trouble is probably not over yet.

Gap fans are quick to point out, though, that the retailing industry as a whole has been feeling the pain for the last several months. The back-to-back drops in retail sales for the months of April and May is the first time sales have fallen for two straight months in the sector since July and August of 1998. Interest rate hikes may be driving consumers to spend less.

The decline of the retail sector year-to-date has been greater than any other three-to-seven month period in the last ten years. While this news certainly doesn't make Gap shareholders jump with glee, it should at least serve as a reminder that, well, all of this isn't the company's fault. Sure, it has some things to work out on its balance sheet, but the overall scene the Gap is a part of is affecting it, too.

When faced with a company that's painting your portfolio with some red, should you bail, sit tight, or buy more? Some Fools on the Gap discussion board are planning to load up on the stock at these levels, confident that the Gap is indeed still a Rule Maker, and that cyclical sectors like retail always come back eventually. Others aren't so sure the company is still making the rules and are thinking about getting out. Before making up your mind altogether, check out Bill Mann's column on selling Rule Makers. He gives some valuable guidance on when to finally tighten the noose on a Rule Maker that's become a drag on your portfolio.

Your Turn:
What do you think? Is Gap still a Rule Maker? Should we cut it some slack because of troubles in its industry? Vote in the following poll and let your opinion be heard:
Is Gap still a Rule Maker?

1. Yes, Gap is still a Rule Maker and I would hold.
2. Not only is Gap a Rule Maker, but I'd buy more at these prices.
3. No, Gap's not a Rule Maker anymore. I'd sell.