Gap Poised for Downturn, Analysts Say

Gap Inc.’s shares, which more than doubled in 1998, may be poised to drop as some big investors bet the No. 3 U.S. clothing chain’s earnings growth will slow next year.

Those investors, who typically trade shares in large blocks, are wagering that the operator of the Gap, GapKids, Old Navy and Banana Republic chains can’t sustain the robust sales and earnings growth it generated this year.

Gap’s stock price has risen 13% since Nov. 10, when investors began selling blocks of its shares, according to Bloomberg’s money-flow analysis. The analysis indicates some people were selling the stock at lower than the prevailing market price. Since then, block trades in Gap completed at lower prices exceeded those at higher prices by about $141 million.

“This is a great company; it’s just expensive,” said analyst Dan Kapusta at Banc One Investment Advisors, which held about 337,000 shares as of September.

Gap shares rose 75 cents to close at $53.06 on the New York Stock Exchange on Wednesday. The company split the shares 3-for-2 on Nov. 30.

The San Francisco-based company operates about 2,420 stores and is the third-largest U.S. clothing chain based on 1997 revenue.

Catchy ads and casual clothing such as cargo pants drew shoppers to Old Navy and Gap in the past year, and Gap’s shares outperformed the market -- and the rest of the industry.

Gap’s shares have far surpassed the 24% gain of the Standard & Poor’s 500 Index and a 53% increase in the S&P; Retail Stores Composite Index.

Gap reported double-digit gains in earnings and in sales at stores open at least a year in each of the last four quarters.

It’s expected to report earnings of $1.30 a share this fiscal year, based on the average estimate of analysts polled by First Call Corp. That’s up 49% from 87 cents last year.

Earnings growth next year is expected to slow to about 20%, analysts said. The average estimate among analysts surveyed by First Call is $1.54 a share.

“You have to applaud Gap for the tremendous growth they’ve shown, but the market has priced in an earnings growth rate that exceeds the sustainable one,” said Brian Postol of A.G. Edwards & Sons Inc., who cut his rating on Gap last month to “maintain position” from “accumulate.”

With the difficulty Gap faces next year in beating 1998 sales, it’s vulnerable to an economic slowdown or any shift in fashion tastes away from basic styles such as khakis, analysts said.