Gap Bull's Rebuttal
by Yi-Hsin Chang ([email protected])

When I started reading Louis' argument, I thought for a moment I had done the wrong assignment and that I was supposed to be the Bear here. Why, Louis loves the Gap, he says. He's no Bear on Gap. At most, he's a BabyBear. From beginning to end, our BabyBear spends more time rhapsodizing over the merits of Gap than justifying his bearish outlook on the company.

BabyBear is "embarrassed" he's not a "happy Gap owner." But our BabyBear complains that Gap's valuation is too high. Certainly, the company's shares have had an impressive run, and if he wants to, BabyBear can beat himself silly for not buying in earlier. But as Tom and David Gardner stress in You Have More Than You Think: "There are really no buy points with these models -- no magic moment when you must purchase your picks. The aim is to find a small group of the most financially sturdy, most profitable, best-performing, best-of-breed, strongest-brand, most professionally managed public U.S. companies."

BabyBear knows that this description fits the Gap just right. In fact, in the same book, Tom and Dave specifically suggest buying Gap, among others, because it is a mass-consumer business everyone knows and "the runaway leader in serving folks of all shapes, sizes, and ages for maximal profit" -- in short, an "Obviously Great Investment." The point is, you can get in a tizzy trying to figure out when to buy a great company like Gap, but in the long run (and I don't mean decades), if you buy Gap today, you won't be asking for a full refund.

Aside from short-term valuation, BabyBear is worried that Gap has "two left feet when it comes to fashion." What BabyBear doesn't realize is that Gap fashion, the Gap look, is the basics -- the jeans and T-shirts we all love so much. These are the items Gap loyalists return for time and time again. Plus, the company makes the bulk of its profits from these everyday items, not its spring or fall fashion lines, so BabyBear shouldn't let this keep him awake at night.

As for Gap's aggressive advertising campaign, up until a year or two ago the company didn't advertise at all on a national scale. It finally decided to more actively promote its brand as it sought to move into heretofore unventured small- to medium-sized towns. The result? Well, our BabyBear seems to approve. He and his friends stop talking when the ads come on TV to marvel at them. Imagine the impression these ads are making on potential Gappers around the country. The Gap is spending more on ads, but it's also making much more as a result.

BabyBear says he'd rather wait for a markdown. What he doesn't realize is that some things don't get marked down, or at least don't go on the clearance racks. Buy Gap, and you can have your porridge and eat it, too.

Next: The Bear Responds