52-Week High Alert: Gap

Shares of Gap (NYSE: GPS  ) hit a 52-week high recently. Let's take a look at how the company got there and whether clear skies are still in the forecast.

How it got here
After a decade of stagnant sales, big discounts, and the wrong merchandise, the growth in same-store sales figures over the past few months would indicate that Gap may finally be turning the corner. Then again, a significantly warmer winter has made shopping a lot easier for consumers who had to deal with terrible weather last year, so there's definitely a "weather bump" being felt by the retail sector. As evidence to this, Gap rivals Ross Stores (Nasdaq: ROST  ) and TJX (NYSE: TJX  ) both reported March same-store sale increases of 10%, surpassing even Gap's 8% rise in same-store sales.

Gap's fourth-quarter results also failed to send the definitive signals that it's turned the corner. Net income for the quarter fell 40% as the company was forced to cut pricing to move undesirable merchandise. Still, from a value investors' perspective, Gap continues to deliver when it comes to its dividend. Following the quarter, the company announced an 11% boost to its quarterly payout.

How it stacks up
Let's see how Gap stacks up next to its peers.

GPS data by YCharts.

This chart serves as a stark reminder as to what can happen to shareholder value if a company continuously fails to put the correct merchandise in front of customers... eh hem Talbots (NYSE: TLB  ) .

Company	Price/Book	Price/Cash Flow	Forward P/E	5-Year Revenue CAGR
Gap	4.9	10.8	13.2	(1.8%)
Abercrombie & Fitch (NYSE: ANF  )	2.2	11.8	10.7	4.6%
TJX	9.6	16.7	15.7	5.9%
Talbots	NM	NM	NM	(12.6%)

Sources: Morningstar, author's calculations, NM = not meaningful.

Talbots' metrics serve as a concrete reminder that the wrong merchandise equals losses. Talbots is in the process of closing about 21% of its store locations as part of an ongoing restructuring effort. Gap, despite its recent success has a long way to go after sales have contracted by 1.8% annually over the past five years. It appears that traditionally pricier peer Abercrombie & Fitch represents a better overall value at just two times book value, and TJX offers a more consistent growth model than Gap.

What's next
Now for the real question: What's next for Gap? That question really depends on how Gap's customer respond once the warm weather conditions wear off and Wall Street gets a truer look at whether its customers are happy with the new product mix. If I had to venture a guess, I'm not sure this has happened yet.

Our very own CAPS community gives the company a two-star rating (out of five), with just 62.5% of members expecting it to outperform. I count myself among the minority here who has made a CAPScall of underperform on Gap and currently find myself down about five points on that recent call. I continue to doubt whether Gap has really gotten a stranglehold on what its customers really want. I think, instead, Gap has fallen into the perfect storm of easy same-store comparisons and value investors are just reaching for a reason to be excited about the stock. I may change my tune by the end of the year if Gap's earnings strengthen, but its latest quarterly report still indicated far too much discounting for my tastes.

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