Mad Money

How Gap Stores Turned Things Around


It’s a longtime Cramer maxim that management matters. For better or worse, the executives who run a company can have tremendous influence on its stock price.

Take JCPenney, for example. Earlier this month, the retailer posted disappointing earnings results, which included a sharp decline in sales and an end to its dividend payment. Shortly thereafter, its stock lost nearly 20 percent of its value in a single session. The results were a dose of reality for investors banking on a turnaround plan from new CEO Ron Johnson, who was credited with helping to build Apple's much-envied retail stores.

Gap Store
Getty Images

Johnson should look at how Gap Stores successfully turned things around, Cramer said. Gap had been a powerhouse during the 1980s and 1990s, but eventually lost its luster. For years, it was left for dead and became the “ultimate has-been retailer.” Year after year, it produced subpar results. From 2006 to 2011, its revenues declined from $15.9 billion to $14.6 billion. Its same-store sales were weak and it seemed the company just couldn’t connect with the consumer.

About 12 months ago, though, Gap started to get its act together. The brand has gained strength while its stock is up 46 percent year-to-date. Cramer thinks it has more room to run, too. So what’s working for Gap?

To start, Gap executives have slowed new store growth, for example. In the year ahead, Gap will open 125 new stores, but close 115 locations. Most of the new locations are being limited to outlets and international expansion.

Gap is also reconnecting with its customers and figure out what they want. Executives read the results across its entire fleet of stores, then reallocate to those stores where the product is performing better and pullback on the allocations to stores where the product is performing less well. They are getting feedback from store managers and improving communication with customers.

JCPenney, on the other hand, did not consult the consumer when it decided to eliminate hundreds of sales events in favor of everyday prices on most items. Doing away with coupons seems to have confused or alienated its customers, Cramer said, as its same-store sales dropped 18 percent in its latest quarter.

Listening to the customer seems to be working for Gap, Cramer said. For the first time, the company is investing heavily in marketing for its brands because it’s much more confident in its products. In turn, Gap reported strong earnings results on May 17. Its same-store sales were up 4 percent for the quarter. Comps improved for each of its brands, too.

Another difference between the two retailers, Cramer said, is that Gap is rewarding its shareholders. While JCPenney eliminated its dividend to protect a balance sheet that most people thought was in good shape, Cramer noted that Gap announced a huge buyback earlier this year. It also raised its dividend by 11 percent, which brings its yield up to 1.8 percent.

Despite the stock’s recent run, Cramer still thinks Gap is cheap, as it currently sells for 12.6 times next year’s earnings with a 10 percent growth rate.

So what’s the bottom line? JCPenney CEO Ron Johnson could learn a thing or two from Gap’s recent comeback, Cramer said. He thinks GPS is a buy, too, because its turn has only just begun.

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—Reuters contributed to this report

When this story was published, Cramer’s charitable trust owned Apple.

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