, not usually the most fashion-forward of retailers, has been a trendsetter the last couple days.
The parent of Gap,
has seen its stock rise the last two days, dragging other retailers along with it, to the tune of Wednesday's 2.6% gain in the
S&P Retail Index
. Wednesday Gap stock posted a 13% gain, to $21.75, and Thursday it added $1.38, or 6.4%, to $22.88. The reason? A positive note from
Mark Friedman, bumping up his rating on Gap two notches, to intermediate-term buy from neutral, citing an impressive lineup of holiday merchandise at the main Gap brand stores. (Merrill hasn't done recent underwriting for the Gap.)
The company, too, has been talking up its new winter offerings, which so far are available only in a handful of outlets. "The holiday product is the strongest we've delivered this year from a Gap brand perspective," said Ken Pilot, Gap brand president, speaking at last week's
Robertson Stephens Consumer Conference
. (The company hosted cocktails for conference attendees at a midtown store to give them a good look at the new goods.) "We're signaling an important change to the customer -- something we didn't do enough of this fall."
The question is whether a few stripey sweaters will a good fourth quarter make. And given Gap's baggage from its other divisions as well as the intense competition among growing specialty retailers and an uneasy consumer, there are still plenty of skeptics out there, even if the stock does appear cheap at current levels.
First, let's put the Gap's holiday lineup -- which is heavy on pastel-colored sweaters and cold-weather gift items like mittens -- in perspective. The company doesn't break down its results by division, but analysts estimate that the Gap brands -- including
-- make up slightly less than half the parent company's annual sales. But the trouble in Gap, which the company admits was partly due to a focus on a too-young consumer, isn't confined to its namesake brand. Indeed, it was the less expensive Old Navy division, its primary growth engine, that saw the biggest swing this year. Sales there went from a percentage increase in the low teens in September 1999, for example, to a decline in the midteens this year.
The company and the analysts who love it have talked a lot about improvements in the Gap's merchandise, and very little about reversals at Old Navy or Banana Republic, which also had a tough fall thanks to a lineup that might have well as been called "Ode to Purple." The only mention Merrill makes of those two divisions is a reference to fourth-quarter marketing campaigns. And there's been very little talk about what the company is doing to distinguish Gap and Old Navy so that the cheaper sibling doesn't cannibalize the main brand. In other words, there are few signs that the company has definitively turned a corner.
Notably, Robbie Stephens analyst Janet Kloppenburg didn't include the Gap on her list of
top holiday retail picks, instead recommending
Abercrombie & Fitch
and seven others. (She rates Gap and Abercrombie a buy and her firm hasn't done underwriting for either.) Gap faces especially tough comparisons with last year's stellar holiday sales.
A consultant who has worked for the Gap is also not impressed. "Gap will coast to a pretty poor Christmas except for its Web site," says Joshua Chernoff, a vice president at
. "The holiday product would have to be really good to get it out of the hole it's in now -- but they'll be back next year," he says.
So what gives with the holiday optimism? Well, because no one doubts the Gap will eventually get it together, and it's now trading at about 14 times trailing earnings, there's a scramble to call the bottom for the stock, says Todd Slater, analyst with
, who rates Gap shares a hold. (His firm hasn't done underwriting for the company.) "The danger is the severe lack of visibility given the company's total lack of guidance," he says. "That leads us to believe that they are still not in control of all the issues" affecting the profit-and-loss statement.
Slater thinks the estimates for the current and next fiscal years -- $1.16 and $1.44, respectively -- may need to come down more. If that's so, the low price-to-earnings ratio won't be so low, after all.
And there's plenty about the fourth-quarter outlook that Gap can't control. The competition, for one: Specialty retailers continue to open stores at a furious rate, producing fierce competition. Moreover, the consumer remains uneasy and is likely to become even more so, when those October brokerage account statements hit the inbox.
have both recently warned that a sudden drop in consumer demand will hurt third-quarter earnings.
It's not that Gap's turnaround isn't on the way, say skeptics. But pinning it to the holiday selection at the Gap stores may be a case of premature optimism.