Has Gap Hit the End of a Good Run?

Shares of Gap Inc. (NYSE:GPS) continue to slide downward in December after posting disappointing same-store sales figures in November. The stock dropped as much as 4.5 percent in early-afternoon trading on Monday, adding to losses over 11 percent drop seen between November 29 and December 7.

Has Gap’s Rally Run Out of Steam?

Shares of Gap were up 93 percent this year through November 29, when the company reported just 3 percent growth in comparable-store sales for the month. This is better than the 5 percent drop seen last November, but still below analyst expectations. Consensus estimates called for a 3.8 percent gain in order to justify the stock’s growth. Shares are now trading down roughly $4 below their close on November 29.

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Year-to-date sales are still up about 4 percent compared to 2011, but this sort of sales growth isn’t in line with the the stock’s price growth. Between August and November, after a huge early-August jump because of strong second-quarter EPS guidance, shares remained stable between $34 and $36.

But weak post-Sandy sales heading through the holiday season looks like it will force Gap to end the year below that price level…

CHEAT SHEET Analysis: Gap is Working Against a TrendThe Flash Crash breeds uncertainty.

Target Corp. (NYSE:TGT) and Macy’s Inc. (NYSE:M) both also missed analyst expectations with their November sales reports, and their stocks have suffered for it. Hurricane Sandy was blamed for soft sales at the beginning of the month, causing average sales growth to miss analyst expectations of 3.3 percent. Retailers reported an average of just 1.6 percent same-store growth.

One of the core components of our CHEAT SHEET investing framework explains that companies riding macro trends tend to outperform those that don’t. The other side of this argument is that companies pushing against a trend will obviously underperform. In this case, Gap is not alone in working against what is clearly an industry-wide sales slump post-Sandy and heading through the Holiday season.

In the absence of deeply concerning fundamental problems with Gap, the recent drop in the company’s stock looks like the market negotiating a fair price ahead of fourth-quarter earnings. Gap’s sales, while below expectation, were still relatively strong compared against the industry.

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