Is This the Time to Buy Gap?


Shares of long-struggling retailer Gap (NYS: GPS) have been on an upward trajectory recently, having risen about 115% in the last year. Is it a good time to buy shares of the stock, or is it simply too late? The retailer's shares seem buoyed more by hope than a great outlook right now.

Is Gap's bull case a case of bull?
Gap's long-awaited turnaround is supposedly under way. Last week, Gap shares jumped after second-quarter earnings gave investors some heartening news. Net income increased 29% to $243 million, or $0.49 per share in the quarter, and total sales increased 6% to $3.58 billion.

Comparable-store sales are key in recognizing whether a retailer's really getting its customers excited again. In Gap's case, total comps increased 4%. Broken out by concept, Gap North America comps increased 7%, Banana Republic's comps also jumped 7%, and comps at Old Navy ticked up 3%.

Still, hold the unbridled enthusiasm and remember that Gap bested easy comparisons. Years upon years of tough times make it difficult to avoid besting previous benchmarks eventually. In the second quarter of last year, Gap North America's comps were negative 3%, Banana Republic's were negative 2%, and Old Navy's comps were flat.

Furthermore, Gap's second-quarter international comps were negative 5% versus negative 4% last year. Granted, that's not surprising given macroeconomic problems in Europe that have cropped up to bite many companies.

The retail comparison game
Gap's results may sound especially bullish compared to news filtering out of other mall-based retailers recently. Aeropostale (NYS: ARO) shares have taken repeated drubbings in a protracted period of malaise, worsened by its recent downward revision of its third-quarter outlook. The back-to-school season isn't even boosting its fortunes right now.

Buckle (NYS: BKE) , which has been a strong retailer for years, even throughout the recessionary climate, has also hit a speed bump; its recent quarterly profit was pretty much flat on a year-over-year basis, and total sales increased only 1%. Comps decreased 0.8%.

Abercrombie & Fitch (NYS: ANF) hardly doled out a superior showing, either. It recently reported that second-quarter net income fell by 52% to $15.5 million, and its same-store sales gave investors a lot to think about. Total comps fell by 10%, and its core Abercrombie & Fitch concept experienced an 11% plunge in comps.

Gap needs a super sale
There's no shortage of desperate retail rivals out there willing to cut some prices and woo some customers. So where does that leave Gap stock? I'd say the answer is "overpriced" given the recent crazy run in its stock price.

For years, Gap's revenue has been anemic or decreasing, and its gross profit margin has been deteriorating as it lowers prices to woo customers. Although Gap's net income has been rising for the last several years, trying to get sales growth back to more robust levels would make it a more solid stock to consider. The last time it reported really robust same-store sales was in the year ended January 2004, when it reported a 7% increase. Since then, every year has featured decreasing comps except for the year ended January 2011, when Gap increased comps by a mere 2%.

Furthermore, Gap's PEG ratio of 1.68 doesn't sound like a bargain, especially if you don't quite buy the idea that the retailer can really pull off expected growth. Although Gap's been struggling to woo back customers for a long time, it also has a super-competitive retail season to contend with in the near term, and more signs that many consumers are not really all that financially stable.

Gap's share price needs to go on super sale before investing looks particularly appealing.

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