Saturday, November 25, 2006

The GAP falls into it even deeper

There are lots of ways to know when you have too much money. Some people continue to buy the highest grade of drugs. Other buy expensive toys out of the Neiman-Marcus catalog. If you're a publicly traded company, you keep mismanaging a once-great brand by retaining the worst managers on the planet, figuring that you can afford to watch your company lose money and market share day in and day out.

Did someone mention the Gap?

This isn't the first time I raked the Gap over the coals, and judging by the latest news, this won't be the last. Managers come and managers go, and with each one comes the prediction that they'll be the one to turn things around.

They never do. Which is why matters at the Gap continue to worsen. In fact, as of November, 2006, the Gap posted nine consecutive quarters of sales drops. Not one. not four. But nine. Nine quarters. In a row. For the mathematically challenged, that's over two years of underperformance.

According to Seeking Alpha's Eli Hoffman, whose reports appear in Yahoo's
Financial News

Retailer Gap Inc.'s woes continue: Profits dropped 11% in Q3 to $0.23/share ($189m), and it lowered its full-year guidance to $1.01-$1.06, down from $1.08-$1.12. Sales were unchanged at $3.86b, but same-store sales were down 5%. CEO Paul Pressler: "We are maniacally focused on our turnaround in the short run." But six months ago Pressler predicted Gap would by now already be headed up. This was Gap's ninth straight quarter of sales erosion, which has spurred rumors its board may fire Pressler. Some investors are positive, citing increased financial discipline and trendier clothing; others say the lack of concrete customer reaction proves Gap has missed the mark. The poor performance wasn't a surprise because Gap already warned two weeks ago. Gap shares were down $0.22 yesterday, and another $0.45 after-hours, to $19.35.

Hello? Investors are positive citing increased financial discipline? Who's kidding whom? Yet another case of Caretaker Manager Syndrome, where the caretaker manager promises to cut spending in order to increase profitability, but completely neglects building the brand.

Over the same nine quarters, Gap has consistently failed to nurture and grow its core brand, relying mainly on cost-cutting and quick-fix advertising. Ask anyone why they would shop at the Gap and - surprise! - nobody can tell you. Watch their latest television advertising and you can see that in their last, desperate attempt to become relevant to anyone who might be watching, Gap has joined the rank of Caretaker-Managed brands who descend into thirty seconds of hip-hop or rap, hoping that someone, somewhere will wander into one of their stores.

There is no reason to shop at the Gap. If there ever was a reason, it died long ago, some time after the management installed the revolving door for its executives. In what may have been a spark of hope, one or two of their long-time managers were shown the door, but that didn't fix anything. Because firing this person or blaming that one doesn't solve the Gap's main bleeding wound:

They have no brand strategy. And all the hip-hop, kitschy or oblique advertising in the world can't hide it.

Last week on CNBC, I put the public on notice that Wal-Mart was on its way to money-losing quarters -- just as I accurately predicted for McDonald's a few years back. This week, Wal-Mart confirmed my suspicions by publicly announcing its "disappointing sales" for November - which includes Black Friday, supposedly the biggest shopping day of the year.

According to Marketwatch:

Wal-Mart Stores, Inc. on Saturday said that U.S. same-store sales in November fell 0.1% from a year ago -- the retail giant's first monthly same-store sales drop since 1996.

The reason? Again, no brand strategy.

When people have no reasons to buy from you, they simply don't buy from you. And if they have no reason, it's because you didn't give them any. They can whine all they want, buy the truth is that Gap, Wal-Mart and tons of other retailers are headed for a big, big tumble. While you're at it, you may want to check out Sears, too. Of course their stock prices are holding up.

That's how you make money when you short a stock.


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