It's Not Yet Time to Fall Into the Gap

Richard Hastings, senior retail sector analyst at Bernard Sands, also believes that merchandise isn't the company's only problem.

"Gap's asset base is much too large for cash flows," he says. "Its No. 1 problem is that it has too many stores."

Hastings suggests Gap needs to shut 75 stores in addition to the 19 Forth & Towne stores that will be closed. Hastings also believes that Gap should simply discontinue the Old Navy concept. "Old Navy is significantly troubled," he says.

The Earnings Call

From a financial results perspective, there shouldn't be too many surprises in Gap's earnings release. Gap has already announced revenue of $4.9 billion for the fourth quarter, and it has projected full-year earnings of 89 cents to 91 cents a share. Same-store sales for the quarter fell 7%.

I'm not sure what management can say on the call to lift investors' spirits, short of a radical change or more upheaval in the executive suite. As stated above, merchandise needs time to work its way through. Any kind of redesign of the stores, while a long-term positive, will cost a lot of money and hurt earnings in 2007 and 2008. Announcing the closure of more stores may be the only way to appease Wall Street in the near term.

Keep in mind that Gap is still a profitable company that generates cash.

However, with the stock trading at around at 19 times 2008 projected earnings, it's no bargain, especially compared with Abercrombie at 15 times and American Eagle at 16 times.

Perhaps Gap will pull a rabbit out of its hat this evening and surprise us all with some good news. But even then, I'd wait until both the stock comes in and there is more evidence that a turnaround is in place before taking a position.