The Gap: CEO's Plan of Action Rings a Bell

Funny how perceptions rule investing. The Gap (GPS) reported earnings Thursday and investors liked the news, sending shares up 5% during a day that saw a 300 point drop on the Dow (.DJI). In reading the company's plan, which I think is a very good one, I could not help thinking, "where have I heard this before"?

First, the numbers:

• Net earnings were $265 million or $0.35 per share.
• Gross margin increased 220 basis points to 34.8%.
• Completed our $1.5 billion share repurchase authorization, purchasing almost 30 million shares in the fourth quarter.
• Generated $1.4 billion in free cash flow.
• Full year earnings were $833 million or $1.05 per share, versus $0.93 last year.

Very good numbers considering sales fell 5% (comparitive sales down 3% vs 7% last year). But, like I have said before, given the current environment, retail investors should expect deterioration here.

CEO Glen Murphy laid out the new direction:

• A renewed focus inside the business on return on invested capital.
• The only sq. footage growth will be outside the US.
• Improve earnings with a focus in growing margin dollars. Said Murphy during the earnings call:

We understand the importance of top line growth. We certainly understand the importance of store comps. But in this environment, given where we are in our turnaround, it is the prudent approach to focus on growth in gross margin dollars.

• Finalize a by brand, by channel, by country, a set of real estate plans.
• Biggest area of opportunity is in cost of goods sold currently "nowhere near were it should be".
• Complete current share repurchase and added an additional $1 billion.

Isn't this almost Sears Holdings (SHLD) Eddie Lampert's playbook verbatim? Now clearly there are some difference (Sears owns far more real estate, has more advantageous leases and have a different model shopper) but the essence of the plan is Lampert's. Reduce costs, maximize return on investment and repurchase shares.

Gap will not be hit nearly as hard as Sears was due to the housing slump, as they sell no appliances, lawn mowers etc. and that will cushion them. Also, consider the company is essentially debt free with only about $190 million outstanding. That translates to a very strong balance sheet.

To date, Murphy has done a fantastic job and looking at the metrics he has to work with he has the opportunity to wring more profits out of the company just by controlling costs, even if the retail environment continues to falter (and it should).

I have been watching Gap shares for almost a year now, but I am hesitant to commit more money to a retailer now given all the uncertainties out there. But when the time comes, Gap is creeping up the list quickly.

Disclosure: Long SHLD.

Comments

[Foust:]

"Reduce costs, maximize return on investment and repurchase shares."

I think you'll find this language in almost every earnings release. Comparing it to Lampert is a bit of a stretch.

2008 Mar 03 03:10 PM