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Stock Analyst Update

Gap's Problems Are Worse than Expected

Investors would be wise to take a wait-and-see attitude.

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Okay, perhaps we were a bit too optimistic in our earlier analysis of Gap (GPS). Recent problems at the company now look like they will take longer to fix than originally anticipated. In particular, the company's Old Navy division continues to suffer from inventory issues, reliance on a fickle teen market, and severly declining foot traffic in its stores. Investors would be wise to avoid buying Gap shares until there is evidence that the problems are being corrected.

This morning, the company announced results that met recently lowered analyst expectations for the quarter ended July 29. Earnings of $0.21 per share were 5% below the prior-year period. Gross margins fell to 37.7% from 41.2% last year as markdowns on outdated and overstocked merchandise hurt margins. Although the company managed to rein in operating expenses as a percentage of sales, it wasn't nearly enough to shore up the bottom line.

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.