Unscrambling Monday's Egg

October 9, 2000 | In Focus Archive »

The Gap: Should We Hold It Or Chicken Out?

Putting The Gap through the Chicks' Dozen
by Chick Megan

There's a small hole forming on the back pocket of my favorite Gap Jeans. Chick Kristin reports having the same trouble. Is this becoming a growing problem? (And I don't mean in our rear ends.) Like the fibers in our beloved loose-fitting jeans, the company which produces them, Gap, Inc. appears to be experiencing some problems of their own. Investors everywhere are in a quandary over whether or not to sell their stock in GPS. Should we sell The Gap? Good question. But, like my Gap Jeans (they ARE the only ones that don't make my butt look huge), I really, really like this company. To sell it, would be comparable to losing those comfy old denim blues. I'm not sure which would be worse.

Let's be reasonable though, and run it through the tried and true Dozen.

1. Buy What Ya Know

Who doesn't know The Gap? The # 1 retail company boasts about its 98% recognition status. That's a pretty big deal.

2. Keep it Simple Sistah

All the investment rhetoric aside, what do you think of when you think of the Gap? Great baby clothes? Awesome loose-fitting jeans? Crisp button-down shirts? How about soft cotton t-shirts? Do we understand these things? We do, we do!

3. Industry. Do we get it?

Well, if you haven't been featured on National Geographic lately my guess is, you're not spending a lot of time walking around naked. (Unless of course your name is Richard and you just won a million bucks.) So the apparel industry is probably one with which you're familiar.

4. Leader in its Field

It's considered the # 1 clothing retailer. If you think about it, who are the other clothing retailers? Banana Republic? Old Navy? Both of those companies are owned by the Gap too! That's a leader.

5. Repeat Profitability

Will this particular companies product be used over and over again? I think if you combine the fact that's it's considered the #1 retailer, with the 98% name recognition, you can deduce that it's something people will continue to buy.

6. Gross Margins

(Sales - Cost of Goods Sold) / Sales
(2,947,714 - 1,837,064) / 2,947,714
1,110,650 / 2,947,714 = .0376
.0376 x 100 = 37.6%

7. Net Margins

Net Income / Sales
183,920 / 2,947,714=.0623
.0623 x 100 = 6.2%

8.Cash vs. Long Term Debt

Cash / Long Term Debt: Cash / LTD
327,860 / 1,022,871 = .32x

9. Flow Ratio: Wish I had better news.

(Current Assets - Cash) / (Current Liabilities - Short Term Debt)
(2,783,729 - 327,860) / (2,400,099 - 859,448)
(2,455,869 / 1,540,651) = 1.59

The Chicks like to see a flow ratio under 1.25. For a better understanding of this concept, take a sec to check out Karin's explanation of Flow Ratio, where she conveniently uses GPS as an example.

10. Increasing Growth

You want to be able to chart your company's numbers and see some growth. Clearly from the chart below, you can see this company is not exactly moving in the right direction.

The Gap, Inc.

9/00

4/00

1/00

10/99

GM

37.6%

46%

45%

46%

NM

6.2%

8.6%

10.7%

10.3%

Cash/LTD

.32x

.57x

.57x

.6x

Flow Ratio

1.59

.74

.90

.75

But wait, I see some light on their Income Statement. Total sales for the five weeks ended September 30 rose 12 percent to $1.25 billion from $1.15 billion in the same period a year earlier. October is supposed to be their clearance month so let's hope they unload some of their unsold goods, which in turn could lower their Flow Ratio. Feelin' any better? Let's keep an eye on their quarterly financials over the next six months and see where CEO Drexler is taking them.

11. Strong Management & Operating History - CEO: Millard Drexler.

On paper, Millard Drexler seems to have covered all his bases. As a youth he spent his weekends and summers working for a local garment manufacturer. He worked for Bloomingdale's and Macy's and eventually became the Pres. & CEO of Ann Taylor. In 1983 he joined The Gap where he eventually moved up to President of Gap, Inc. He also directed the launch of Old Navy and Banana Republic. K, that's the boring stuff. Now here's the good stuff: An excerpt from a BusinessWeek article states that "Every week, Drexler strolls anonymously into Gap stores from coast to coast to schmooze with consumers and clerks alike in a constant drive to improve the company's products and services. This hands-on style has been Drexler's trademark since he took the helm at Gap in 1995. Never mind that he runs a company of 81,000 workers in one of the most mature industries around. To Drexler, Gap is still a fledgling."

Part of CEO Millard Drexler's plan is to become the convenience store of retail, you know, a Gap on every corner. Huge portions of their dollars are going into making that happen. Therefore, the long-term debt figures are on the increase. "Mickey" Drexler (as friends and family call him) knows the apparel industry can be a game of cat and mouse... and he also knows he needs to stay ahead of the game so he doesn't get eaten alive.

12. Buy On Sale

52 Week High

53.75

52 Week Low

19.56

Current

19.38

That's just terrific if you're looking to buy on sale.

Look, even if you're not familiar with the Apparel Industry, something tells me you're probably familiar with the holiday season. Right around the corner sits the best opportunity The Gap has to see some major turn around. We will have to wait and see. Based on the Chicks Dozen, The Gap's failure to meet half of our criteria makes a strong case to sell. But because we are women, and patient ones, (and love our Gap jeans,) we are willing to give them some time and see what happens the next couple of quarters.

As for your Gap Jeans, I can't exactly fill in all the holes for you (literally or figuratively) but I feel pretty comfortable in saying this: Gap, Inc. still rules the roost with their 3-brand marketability. When The Gap is cold, Old Navy is hot, and when Banana Republic is only lukewarm, well, you get the picture.