Shares of Gap (GPS) have bucked the trend of destruction that has swept through the specialty retail sector this year, tripping up household names such as Aeropostale (ARO) and Pacific Sunwear (PSUN).
Unfortunately, the remarkable 20% gain in Gap is completely unfounded and borderline ridiculous, and the stock should be avoided at all costs. On Monday, shares popped about 1.5% on a positive note from KeyBanc, citing improvements in product style, fits (always an issue with Gap and most especially Banana Republic) and pricing. I don't know what buds that analyst team is smoking, but my rather frequent checks into Gap and Banana Republic have yielded quite the opposite observations.
First of all, Gap's stores were set with absurdly bright colors almost the day after Christmas -- I think this continued traditional approach to merchandise allocation remains an issue, especially as consumers continue to buy closer to need rather than investing in clothing months in advance.
Second, Gap's products across the board for men have been the most uninspiring, lackluster offerings I have seen in quite some time from the company. Gap should be embarrassed by the blandness in an industry where companies such as H&M and Forever 21 continue to gain customers due to their trendy, affordable styles. As for women -- obviously, I am not wearing the stuff -- but the offerings I have seen post-Christmas are almost as uninspiring as for the men.
All in all, I think Gap's first-quarter results are trending nothing short of disappointing, and guidance for the second quarter will be on the weak side.
If you are so inclined to play specialty apparel into the spring, it should (believe it or not) be through Abercrombie & Fitch (ANF). The company is undergoing a nice rebirth amid a new designer and leadership who are returning the brand to its roots in casual yet trendy rugged looks. I came away very impressed with the blocking and tackling being done by Abercrombie & Fitch's new CEO when chatting with him recently for TheStreet.
Having said that, if you are not inclined to trust my assessment of Gap's apparel, then base your views on the name on cold, hard facts.
Leadership: Gap's relatively new CEO, Art Peck, has not proven he could reinvigorate the brand. In my view, the stock is trading up on the ambitious hope Peck drives a spring turnaround at Gap and Banana Republic, while not allowing Old Navy to fall off the map following the loss of a key executive to Polo Ralph Lauren (RL) late in 2015. Frankly, I don't think anyone could save the Gap division -- it has long entered a period of steady decline that will unlikely end well in my lifetime.
Monthly sales releases: The company's monthly sales releases continue to point to horribly weak sales on a global scale. All of the releases so far this year reek of a retailer struggling to find a place in the hearts of consumers, not one on the comeback trail (I encourage you to look at how the sales trends are changing for the better at Abercrombie & Fitch, an example of a retailer headed for a turnaround). I think investors will be wise to remain focused on Gap's weak sales -- the market is likely to dump its hope for a spring sales revival and assess Gap for what's really happening.
Online sales: Amid the ongoing boom of online shopping, Gap's online sales have basically gone nowhere in recent years. Gap's online sales of $2.5 billion in 2015 were unchanged year over year, and up marginally from $2.3 billion in 2013. That is laughable, worrying and flat-out weird. By comparison, Lululemon's (LULU) online sales rose 25% in 2015. Nike's (NKE) online revenues surged 56% for the three months ended Feb. 29. Even the world's largest retailer, Wal-Mart (WMT), saw better online sales growth than Gap in 2015 -- global e-commerce sales rose 12%.
Bottom line is that if a retailer is not growing strongly online in the age of digital, there is something fundamentally wrong with the company; don't invest in it until trends are reversed.
