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Why Gap's "Turnaround" Is Anything But


The company simply saw a small recovery from over three years of negative -- sometimes double-digit negative -- growth.

I almost gagged browsing through Gap Inc.'s (GPS) Yahoo News feed this morning covering the company's fiscal-year results released last night. Headlines from "Gap's Impressive Turnaround" to the company's recognition in "Retail's Resurgence Is Remarkable" article are downright ridiculous.

Figures like the 4% fourth-quarter-sales increase and 2% comps improvement helped generate buzz about Gap's supposed turnaround. But Gap has been struggling for years. It was bound to post a quarter of growth.

The company credited a lot of its performance to Old Navy, which saw a 7% increase in comps. Prior to this year, Old Navy hadn't posted a month of positive comps since 2004.

That's not turnaround success. That's simply a small recovery from over three years of negative -- sometimes double-digit negative -- growth.

Total sales for the year still slipped 3%, continuing its trend of posting negative annual comps all but one year in the last decade.

There's a reason Gap's stock has hovered between roughly $15 and $22 since the stock crashed during the dot-com bubble. The company is going nowhere. The turnaround has been a work in progress since the beginning of the decade.

Because of its fiscal health, management seems to gamble on projects and investors seem to buy into the value play mentality as excitement circles around each new idea that never pans out.

Its current enthusiasm revolves around several areas. The Piperlime e-commerce site, which is looking like an Amazon (AMZN) wannabe, is expanding into a third-party e-tailer of higher-end brands from Marc Jacobs to VF Corp's (VFC) 7 For All Mankind jeans. Like every retailer on earth, it wants to tap China, as well as other international markets. And it thinks it's finally found a successful Old Navy model it wants to roll out to numerous locations.

This is a pattern we've seen before from Gap.

The much-talked-about Forth and Towne concept hung "opening soon" signs not long before replacing them with "closing soon" signs. Gap's flagship brand lost its identity through the years. Unlike J. Crew (JCG), which does an outstanding job of modernizing its preppy merchandise, Gap made drastic and ineffective changes by transition itself from traditional khaki preppy to hip back to the same exact traditional khaki preppy.

But management was certain each time they were on the right track.

Management and investors can gush about a quarter's worth of expanding margins and profit growth. And they can tout that cash-rich, debt-free balance sheet all the want. The fact of the matter is, Gap's future isn't a numbers game. Gap has continuously made errors in its merchandise selections, store layouts, fashion trends, and expansion strategies. Numbers can cover up Gap's fundamental flaws on a piece of paper, but they won't generate equity value in the long-run.

In many cases, retail is a boom and bust industry. Brands come and go. Like Starbucks (SBUX), Gap majorly over-expanded (there's one on every corner in NYC). Like Abercrombie & Fitch (ANF), Gap has a strong balance sheet and the fiscal ability to sustain and try to fix its business while its brand fades away.

The bottom line, Gap's days have long been over. Investors seeking to reap dividend income may benefit from Gap ownership, but in my opinion, meaningful capital gains are off the table.
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Position in SBUX.
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