Special Feature, February 9, 1999: Stocks Fools Love, Gap Inc.

<SPECIAL FEATURE>
February 9, 1999

Stocks Fools Love

Gap Inc.
by Dave Marino-Nachison (TMF Braden)

Trading at $64 1/4 as of February 8, 1999

Whenever I shop at the Gap, it's usually not until after I've wasted an afternoon wandering through the rest of Georgetown's tony shops and upscale chains. Why do I bother? Maybe I think there's something more stylish around the corner at Urban Outfitters <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: URBN)") else Response.Write("(Nasdaq: URBN)") end if %>, a little trendier over at Abercrombie & Fitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %>, or a little more modern at Armani Exchange.

Well, maybe there is, but I don't buy it. Instead I walk, with my head down, into the Gap as if apologizing to my girlfriend for flirting with a waitress. And there she is, as always, packed with jeans that fit; oxfords that don't cost $50; and khakis that groove, swing, and rock.

What's the connection between my love life and Gap stock? Maybe it's a stretch, but for me the Gap is the girl I just can't bring myself to leave. If I occasionally betray a curiosity about how I might look in butterfly collars and bell-bottoms, my imagination may wander, but my credit card rarely does.

Like Dave the shopper, Dave the investor has a hard time finding a better company than Gap where apparel merchants are concerned. In this massive 2,430-store chain, you've got the only retailer to qualify as a bona fide Rule Maker. The rules of fashion may change with the wind, but Gap is so strong it doesn't blow over. It makes the wind go around.

What other company could have convinced an increasingly casual nation that khaki pants -- in my youth a monument to stodginess -- work just as well at the X-Games as the golf course? Emboldened by that audacious declaration, the minds behind Gap's unforgettable ads are now working to convince America there's something original about blue jeans.

Advertising, however, is only part of the story at Gap. Perhaps more impressive is the company's ability to quickly turn its Old Navy division into a national power. Old Navy, recently ranked #2 nationally among teens' favorite stores (Gap was #7) in one survey, is Gap's main growth engine. With 400 stores, it has plenty of room to spread its wings.

Growth, of course, is what every investor wants, particularly when paying top dollar for a company -- and Gap stock certainly isn't cheap. Wall Street, while generally recommending it as a "buy," is largely mixed, with valuation a key concern.

Should it be? A look at a five-year (or even a one-year) Gap stock chart shows that few buyers in recent history have reason to be disappointed. Case in point: when TMFs Puck and Seymor dueled over Gap in July, the bearish Seymor lamented the stock's valuation -- and the stock was trading in the low $40 per share range (adjusted for a 3-for-2 stock split effective Dec. 1).

And there's still room for Gap to grow. Besides growing its domestic store base and developing Internet strategies for each of its divisions, the upscale Banana Republic division is returning to its catalog roots, while GapBody is attempting to steal some of Intimate Brands' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBI)") else Response.Write("(NYSE: IBI)") end if %> silk. The inoculation starts early, with BabyGap and GapKids, both credible extensions of the line.

Gap also hopes to parlay its strong domestic brand into success overseas. Brand building in foreign countries is certainly a challenge, but the opportunity is enormous if the company can capitalize.

And what Gap can't do with momentum, it makes up for in power. Gap certainly has competitors on the store level but, as a company, Gap stands alone with its size and diversification.

As of December, sales for the trailing 12 months were $8.91 billion, about 37% higher than last year's full-year figure (fiscal 1999 earnings are expected in late February). Gap's sales have improved by increasingly impressive double digits over the last five years. But solid sales growth hasn't meant an easing of internal controls, as gross profit margins have trended steadily upward. (For plenty of useful math, check out the former Cash-King -- now Rule Maker -- portfolio's April Buy Report).

Shoppers looking to pick up Gap stock in the near term may look for opportunities driven by the company's year-end earnings report -- but investors looking for surprises should note that preliminary signs point to a strong winter quarter, with same-store sales up 16% and 19% in the first two months of the most-recent period. And just released January sales figures showed same-store sales up 15% over January 1998.

Things are good between Gap and me, just as they are between Gap and its investors.

So what if my eyes occasionally wander? As Gap's cash registers know too well, my money rarely strays, and isn't likely to anytime soon.

Gap Company Information:
Trades on the NYSE under symbol GPS
Web Site: www.gap.com

Company Address:
One Harrison Street
San Francisco, California 94105

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A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.