Gap (NASDAQ:GPS) Don’t Act like Retailers

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By Joseph Carducci on November 21, 2014 Company

Gap (NASDAQ:GPS) is a pioneer in basic apparel. Headquartered in San Francisco, the company posted yet another round of disappointing results in the last quarter. As a result, sales went down heavily during trade this morning.

For the complete fiscal, Gap (NASDAQ:GPS) reduced their estimates. They had set their estimates to $3, which they reduced to $2.73. As this is the end of the year, it was very annoying to have the company send out a warning signal just at the brink of the most important selling season of the year – the holiday season.

Glenn Murphy, the current CEO of the company, announced this October that he will be leaving the company at the dawn of next year. With the disappointing postings, Mr. Murphy will have a tough exit. Mr. Murphy is now in such an awkward position that he is watching his successors dismantle his team in Gap (NASDAQ:GPS)’s management, as he stands at the edge of retirement from the company.

What is the real problem though? Gap (NASDAQ:GPS)’s CFO, Sabrina Simmons informed that the company is planning to reduce its expenses from $750 million to $700 million. The reason behind this reduction was the ROI of the company. Simmons said that as the margins are falling, so there is no sense in investing on stores.

Gap (NASDAQ:GPS) is following the footsteps of Sears. The company was the biggest retailer in the world. By reducing investment on stores, it gradually reduced itself to a small merchant. However, Simmons was not upset. She, and the rest of the management, talked about the massive buyback of the company shares. In the third quarter, the company had spent about $433 million and bought back about 11.4 million shares. With each share priced at $38, this sounded like an excellent investment. That is, until Gap (NASDAQ:GPS) posted the earnings of the third quarter. The stock went back down soon after the results were reported and the stores are looking pretty bad.

Gap (NASDAQ:GPS) are taking all the wrong steps over all. On the very fundamental level, the company is quite sick. The stores are in need of TLC. The management team should behave like merchants, traders, owners of a large company! Instead, they are acting as if they are owners of a hedge fund which is trading the shares of Gap (NASDAQ:GPS).

The company is hoping to increase shares today by lowering their investments on stores. However, they are actually lowering their potential ROIs in the long run. This is why Gap (NASDAQ:GPS) does not seem to behave or think like a retailer. The company is making a big mistake.

If you are an investor, buying shares of Gap (NASDAQ:GPS), then you will only by them for the sake of trade. However, if you are buying them for any other reason, then the only rationale behind this trade would be that you believe that the new management would come and turn the company around soon. Otherwise, there are many competitions out there who will eat away Gap (NASDAQ:GPS)’s market share.