1 Thing Gap's Got Going for It

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This article is part of ourRising Star Portfolio series.

Sometimes it's difficult to imagine that beleaguered retailer Gap (NYS: GPS) has anything in its favor. After years of malaise, Gap still has at least one heartening factor in its favor -- but that may not make the retail stock worth our while.

In my search for socially responsible companies for my Rising Star portfolio, I recently noted Gap's spot on Ethisphere's "World's Most Ethical Companies" list for 2011. The clothier joins the likes of Whole Foods Market (NAS: WFM) (which I purchased for the portfolio in May), Best Buy (NYS: BBY) , and Target (NYS: TGT) . Ethisphere applauded all its honorees for ethical leadership in their industries, reflecting the organization's credo: "Good. Smart. Business. Profit."

Gap dedicates a good portion of its website real estate to its efforts in corporate social responsibility. Among other efforts:

  • 100% of Gap branded denim complies with a Water Quality Program to ensure that wastewater is treated before discharge into the environment
  • The company has committed to reduce absolute greenhouse gas emissions by 20% in 2015 (from 2008 levels).
  • Gap's Personal Advancement and Career Enhancement Program (P.A.C.E.) trains participants in work and life skills. Some 5,000 female workers from six countries have taken part in the training

Retailers and consumer-facing brands haven't always had the best reputation when it comes to social responsibility. Shareholder advocacy organization As You Sow released its "Toward a Safe, Just Workplace Report" last year, grading companies on how well they avoided sweatshops and other human rights abuses within their supply chains.

The report included a scorecard with survey results pertaining to retailers' social labor practices throughout those supply chains. Gap scored a B. Only Levi-Strauss and Wal-Mart (NYS: WMT) scored higher, with B grades. VF (NYS: VFC) , which recently purchased uber-socially responsible Timberland, got the lowest grade of the respondents, C-. (Note that 18 companies did not respond to the survey.)

Gap also made a positive impression by landing the highest score (B-) in Management Accountability for social compliance. That's highly impressive, because the average score there was a dreadful D.

Given Gap's other problems, it's nice that the company receives props for good corporate citizenship. Does its single-digit price-to-earnings ratio also earn it a place in this portfolio?

Sadly, Gap's positive spin on corporate citizenship simply doesn't outweigh the fact that it hasn't been able to institute a real business turnaround. Its unimpressive revenues and sad same-store sales figures for years running tell me it's still fumbling.

Gap's worth watching, but not buying. Although my Rising Star portfolio is all about positive corporate behavior, I also want exemplary companies that will yield positive returns. If and when Gap gets its competitive groove back, it could find itself back in the running.

At the time this article was published

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