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Cramer: Here's why The Gap remains a toxic stock

So far this year, Jim Cramer has seen many once red-hot stocks completely cool off. Now that the market seems to be finding its footing again, he decided to dig through the rubble and find out what broken stocks may be worth investing in again.

"You need to be able to tell the difference between beaten down stocks that deserve to be bought and beaten down stocks that deserve to be beaten some more," the "Mad Money" host said.

The Gap is one company that has been on a total roller coaster. As the parent company to Banana Republic, Old Navy and other various Gap brands, it totally dominated the late 1990s and early 2000s. Growth slowed and business cooled off for about a decade, until The Gap launched a comeback a few years ago—and it looked to Cramer like the stock had gotten its groove back.

That comeback changed dramatically when shares of The Gap plummeted 41 percent last year. And while the stock has rebounded 8 percent this year, it is still far from its highs.

So what happened?





Gap store
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"Put it all together and Gap running up into the quarter feels like a recipe for disaster" -Jim Cramer

Cramer saw the first sign of pending doom in October 2014, when the architect behind The Gap comeback, CEO Glenn Murphy, announced his planned retirement at the end of the year.

In January 2015, new Gap CEO Arthur Peck conducted a large shake up of the company's management. He eliminated the role of Gap Brand creative director, and created a new general manager of customer experience to oversee e-commerce and marketing.

At the time these changes were viewed as positive for the stock, but things started heading downhill in May 2015, when Gap delivered earnings that were widely regarded as disappointing.

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By the time Gap had reached 2015's back to school season, the stock was badly beaten down. Things only became more difficult as the fall and winter turned out to be a difficult period for the retail sector.

The company also pre-announced ugly fourth quarter results following a glum holiday season. Additionally, investors learned that same-store sales were down another 8 percent in January 2016.

"The fact is, this company has done very little to inspire any confidence in its ability to turn around its declining same-store sales," Cramer said. (Tweet This)

While the stock has been propelled higher by the recent market rally, Cramer is not optimistic when Gap reports on Thursday, especially given the worrisome results in other retailers such as Nordstrom and Macy's.

"Put it all together and Gap running up into the quarter feels like a recipe for disaster, at the very least a recipe for no upside," Cramer said.

Some of the issues plaguing the stock were not really the company's fault. However, it does seem to Cramer like the company has been struggling to get its act together since the former CEO left at the end of 2014.

Until the company can demonstrate a real turn around in its core brand and deliver earnings growth, Cramer is not a fan.

"I bet this stock will continue to be toxic, and there are so many other better retailers including Costco, TJX and Ross Stores that are far more likely to thrive in this environment," Cramer said.

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