In March of 2007 I made a request for the new GAP (GPS) CEO, make him or her a grad of “Lampert U”. Did anyone else have a flashback when looking at Gap’s results yesterday?
Then I said “most important thing they can do is grow profits, not just sell merchandise. Somewhere along the way, retailers got the “bigger at all cost is better” mantra ingrained in them and began to chase sales over profits. Lampert and Day have said, profits matter most, not just sales. This has lead them to close under performing locations, sell off unnecessary assets, keep closer tabs on inventory and not just discount merchandise to drive unprofitable revenue growth. They then take this extra money and begin massive share buybacks, pay off debt and to re-invest in the current locations that are performing satisfactorily.
The potential here for a CEO like this to make shareholders very wealthy is just waiting to be had as Gap has $2 billion in the bank, produces another $1.5 billion of operating cash flow per year and is virtually debt free. If they would stop investing in trying to just get bigger and got smart, they could return a ton to investors via buybacks (I estimate 15%-20% in year one at current prices). Currently Gap (GPS) shares are trading over 10% below their early year buyout rumor highs.”
In March of this year new CEO Glen Murphy laid out his plan. It included increase the share repurchase plan, increasing margins and halting square footage growth in the US. Hmmmm.
Yesterday:
Reporting after the closing bell, Gap (GPS) said it earned $249 million, or 34 cents per share, compared to $178 million, or 22 cents per share, a year ago. Even though it beat the Street with earnings, Gap’s sales fell to $3.38 billion, compared with $3.55 billion a year ago. The retailer’s same-store sales fell 11% in the first period, worse than the 4% decline it suffered a year ago. Gap did better overseas, with sales falling just 5%.
The company’s Old Navy stores hurt the most during the first quarter, with sales tumbling 18% to $1.2 billion. Comparatively, sales at its North American Banana Republic stores fell by 4% from a year ago. Gap’s so-called same-store sales have now declined in 15 consecutive quarters. Despite all this, Gap reaffirmed its 2008 earnings outlook of $1.20 to $1.27 per share. How? A more disciplined cost approach combined with lower advertising expenses, layoffs and other cost cutting has increased Gap’s profits for four consecutive quarters.
“We are pleased with our first-quarter results, as we delivered solid earnings growth in a difficult environment,” CEO Glenn Murphy said. “We are focused on bringing compelling product and shopping experiences to our customers while managing costs tightly. We believe this approach is proving even more prudent given the current economic conditions.”
This is textbook Lampert (SHLD). One could even throw RadioShack’s (RSH) CEO Julian Day in the mix. Effective cost management, share repurchases, margins control lead to increasing profits.
Back then (15 months ago) I said that if Gap hired a CEO along Lampert’s way of thinking I would buy shares. Now I am not. I am hesitant to enter the category now already owning shares of Sears (SHLD), Wal-Mart (WMT), Harley Davidson (HOG) and Borders (BGP). There is way too much economic opaqueness out there to invest new money in retail but Gap is climbing to the top of the list when things clear out a bit.
Disclosure (“none” means no position):Long SHLD,HOG,WMT,BGP none
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