Gap's Latest Plunge Leaves Bullish Herd Holding the Bag

Ten Wall Street analysts rate the stock buy or strong buy despite its continuing woes.
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If it's time to throw in the towel on down-and-out clothier

Gap

(GPS) - Get Report

, no one has told Wall Street.

The company disappointed investors yet again Thursday in saying that same-store sales, which measure activity in shops open at least a year, plummeted 17% in the second quarter, a far steeper decline than the 5.9% drop analysts had expected, according to Thomson Financial/First Call. The company also lowered sales guidance for the third quarter.

It was the 17th consecutive month of declining same-store sales for the once highflying retailer. Even so, many Wall Street analysts remain remarkably bullish on the company. Ten analysts rate the stock either buy or strong buy, while 15 have hold ratings and two advise investors to sell. For example, UBS Warburg analyst Richard Jaffe released a report lowering his earnings estimates -- yet he maintained his buy rating. (Jaffe was not immediately available for comment; his firm does not have a banking relationship with Gap.)

Investors clearly wanted no part of the Gap on Thursday, driving shares down $3.19, or 17%, to trade at $15.81 about midday.

Free-Falling
Gap's same-store sales, year-on-year decline

Source: company

With each disappointment, analysts have ratcheted down earnings estimates while expressing optimism over the company's long-term prospects. But the latest bit of bad news could mark the end of Wall Street's love affair with the company, which operates the Gap, Banana Republic and Old Navy chains, notes one analyst who turned bearish long before most.

"We opined on the heels of the company's second-quarter earnings report that the stage was being set for capitulation on the part of the herd of bullish sell-side analysts who have continued to be faithful Gap supporters," wrote Jefferies analyst Donald Trott in a note published Thursday. "That process started as a trickle a few weeks ago and we look for it to gain momentum here." (Trott has a hold rating on the shares, and his firm does not have an underwriting relationship with Gap.)

San Francisco-based Gap saw its shares decline nearly 40% last year, as management continually promised to reverse woes inflicted by overexpansion and stale fashion. Before Thursday's plunge, shares were off an additional 25% this year; the turnaround promises continue, but the turnaround itself remains elusive. Earlier this year the company restructured its management, announced its first-ever wave of layoffs and scaled back its planned square-footage growth for 2002 and 2003.

In comments typical of recent Gap press releases, Chief Financial Officer Heidi Kunz said: "August results fell well below our expectations from both a

comparable sales and margin perspective. Given these results, coupled with the current economic environment, it's unlikely we will achieve our prior comparable store sales guidance of a mid-single digit decline for the third quarter. Beyond that, it's difficult to provide specific guidance at this time."

Gap's August sales figures headlined an otherwise lackluster batch of same-store sales numbers released by the nation's major retailers Thursday. Most figures were modest and largely in line with analysts' expectations.