Getting Giddy on the Gap

The problem with this turnaround story is, well, there's a GapGPS in it.

The stock's jumped nearly 80% in two months, and this week, two analysts upgraded the struggling retailer's shares while another reiterated his buy rating, suggesting that Gap is finally righting itself. But the company's believers have been fooled before, and a number of observers say the company's short-term success may be drawing attention away from long-term problems such as high costs, competition from discounters and weak branding.

"I think people are a little too excited about this turnaround right now," said Jeff Matthews, general partner of Greenwich, Conn.-based investment firm Ram Partners, and a RealMoney Pro contributor. "They have a long way to go before they're Abercrombie again."

Until last month, Gap had been in a free fall for more than two years, posting 29 straight months of declining same-store sales. The San Francisco-based company finally broke the losing streak when it posted same-store sales gains within each of its four primary divisions in October. For an encore, it is expected on Thursday to post positive same-store sales figures for November.

Some see this as evidence that the company's efforts to right itself are finally paying off. Earlier this year, the Gap replaced chief executive Mickey Drexler, who presided over the company's huge growth in the mid- to late-1990s, with Paul Pressler, a longtime Disney executive. Under Pressler, the company has attempted to better differentiate its Old Navy, Gap and Banana Republic brands.

The company, which nearly doubled its store space in recent years, also has promised to close some of its stores and cut the total square footage it operates by 2%. And it has attempted to keep its capital expenditures in check.

A recent advertising campaign helped push sales at Old Navy in October, wrote UBS Warburg analyst Richard Jaffe in a research note on Tuesday. A similar holiday ad blitz likely will help the company's sales in November and December, Jaffe said.