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The Gap, Inc. Message Board

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  • be_careful_outdere be_careful_outdere Jul 2, 2000 2:05 PM Flag

    Stock Strategies: RuleBreaker:

    Another Bummer for The Gap?
    by Dan Dorfman

    Jun 30, 2000 01:00 PM

    NEW YORK (
    -- Next Wednesday, The Gap (GPS), a leading casual
    apparel specialty chain with 3,145 stores, will report
    its June comp-store sales.
    One money manager who
    doggedly tracks the retail sector tells me the month's
    showing should be a bummer.

    This view, he tells
    me, is based on a check of inventories, prices and
    traffic at a smattering of the company's stores in its
    three major chains--The Gap, Banana Republic and Old

    The chief findings: Generally high inventories,
    bigger-than-usual seasonal markdowns and weak traffic, especially
    in the domestic 513-store Old Navy chain, which is
    The Gap's major growth engine and represents 36% of
    overall sales.

    In one Old Navy store, a jacket had
    been marked down 96% after a series of discounts
    failed to produce the sale of the garment.

    May, Old Navy comp-store sales fell 7% - 9%. The money
    manager believes this division's June sales could easily
    be as bad as May's, if not worse.

    "I feel
    pretty sure the company's June results will be worse
    than expected," the money manager tells me.

    poor June showing, if indeed that's what The Gap
    reports, would follow a dismal May performance
    characterized by a 2% decline in comp-store sales and weak

    Already there's speculation, as noted by Robertson
    Stephens analyst Janet Kloppenburg, that June and July may
    not be any better than May.

    This concern, she
    points out, is based on the currently weak performance
    of the Old Navy division, as well as continued
    weakness in The Gap division's men's

    Accordingly, Kloppenburg is raising the prospects of a
    shortform in her earnings estimate for the current second
    quarter. She sees the possibility of $0.22 a share, versus
    her previous forecast of $0.25 and reported earnings
    of $0.22 a share a year earlier.

    The Street's
    consensus is $0.26.

    Kloppenburg's revised thinking
    also suggests to her the prospects of
    less-than-expected earnings for all of 2000. Her prior $1.50 a share
    estimate has been cut to $1.47. The company earned $1.26
    in 1999.

    Kloppenburg says that if The Gap
    continues to disappoint, the company could earn as little
    as $1.40 a share in 2000 and $1.69 in 2001. Still,
    she feels the company could well achieve her 2001
    estimate of $1.80.

    But what about the

    It has been clobbered this year, plunging from the
    52-week high of 54 to a recent 52-week low of

    It is currently trading at 30 15/16, up

    Kloppenburg believes The Gap, given its sharp decline,
    represents a compelling entry at its current level. However,
    she also cautions that if you apply the company's
    historically low multiple of 15 to the share price, the stock
    could trade as low as 25, a decline of more than

    In other words, The Gap, which declined to discuss
    June sales trends, may look dirt cheap--but The Gap
    could be a stock trap.

    Apparently, a fair number
    of investors share this view, as evidenced by a
    whopping short interest (a bet the stock price will fall)
    of nearly 5.5 million shares--this despite the big
    drop in the stock price.

    I don't know what it
    all means, but I recently visited a Gap store in
    midtown Manhattan. I was the only customer in the place.
    Only one other person came in while I was there and he
    was looking for the bathroom.

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