Thursday, February 23, 2006

Gap Sinks In After Hours

We were wrong about Chico's (CHS). Netease (NTES) took us to the cleaners. But at least we got the Gap (GPS) call right.

On today's earnings conference call, Gap said it wanted to jack up its share-repurchasing program & raise its dividend by 78% next year, even as it reported declining sales and earnings for its holiday quarter.

Don't worry -- we're just as confused as you are.

Gap continues to hemorrhage market share to trendier apparel names like Abercrombie (ANF) and American Eagle (AEOS). Given management's shaky tone on the call today, we rate this stock a sell.

Gap CEO Paul Pressler summed it up best: "We are acting with a tremendous sense of urgency to win back our customers."

We berated Gap on Tuesday night:
...We'd like to see Gap boost margins and give the Street something to look forward, which is asking a lot given Gap's dire predicament.

There is no doubt product execution at the stores is improving slightly, but something tells us Gap's revitalization is going to take longer than bulls expect. In a word, Gap's brands are deteriorating. All three of its core brands had a lacklustre 2005. Store traffic is down, even as overall consumer spending remains decent; merchandise at Gap is simply not compelling enough to trigger bulk purchasing. Gap's growing pains reflect a company hitting the maturity point of its life cycle -- don't count on Missy to add a little hop to this not so hip stock.
Shares of Gap tumbled 6% in after hours trading. Meanwhile, Chico's -- our favorite name in the retail space -- took a beating today after Wedbush Morgan downgraded the stock to a hold.

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