Limited (LTD), GAP (GPS), The Same Problem and Equally Mediocre Results.

Implications: Limited Brands and the Gap sell different products, but have many of the same problems.  Here's why results may not meaningfully improve for either company

Analysis: The Gap’s seven year decline and the Limited’s continuing demise should force investors to rethink just what it takes to make retailers successful in the market place, especially the turn around companies.  Many believe a company has to excel in at least one of the following areas to be successful: operations, service, or product.  That may be one reason why traders are so quick to buy retail stocks that are cutting staff, decreasing inventory, and adding technology.  But realistically, with the exception of real low cost providers of service like Wal-Mart, the overall characteristic of a successful retailer is defined by the product its sells.  

Whether taken in part or in totality as an extended product offer, including service, product is what consumers take home and it’s the right product that keeps a store’s customers coming back.  Investors frequently lose sight of that fact when buying into turn around companies.  The Gap and Limited are two such examples of once great fashion companies that are in decline because their product is irrelevant to today’s market.     

Granted, improvements in operations, such as better markdown control, less inventory, and reductions in cap-ex may have improved current earnings and cleaned up the company’s balance sheets, but that in itself doesn’t mitigate the fact that both companies need to reinvent their product offer to stop the loss of market share and that hasn’t happened.  

Part of the problem stems from the sales inertia because of the size of both companies, especially the Gap.  Overseas sales propelled by a weak dollar and rising incomes in Asia-Pacific area have proven fertile selling fields for many US branded products, even the mediocre ones.  Also, established supply chains and large chain operating technology has been as important to local investors as the brands themselves.  That has made joint venture capital accessible to the likes of the Gap, in spite of the brands continuing decline in the US market.  However, a stronger dollar may force overseas consumers more discriminating and the company’s transfer of skills diminishes exponentially with time.  

The Limited’s sales horizon is bleaker.  Unlike the Gap, Limited Brands doesn’t have significant overseas distribution to bolster decreasing domestic sales and earnings.  But those offshore sales can’t obscure the company’s product weaknesses either.  That could be a good thing if it forces management to deal with the product issue head on which is something Gap’s not so new management has failed to do.    

While the product sold by the two companies is different, the problems have a common root.  That is age.  Unfortunately, both company’s traditions are rooted in the fashion era of the 1980’s and 1990’s, a pattern of buying which has been declining in relevance to consumers for some time.  Then the driving factor in fashion was ‘timeliness’ where colors, make up, style, and jewelry changed four or five times a year.  Now that paradigm is out of step with current generation of fashion buyers, both young and old alike.  

Now ‘timelessness’ is the driving factor in the fashion continuum supported on one end by low price and on the other by quality, functionality, and utility.  That’s all the more true today with energy and food prices sky rocketing.  Neither, the Gap nor Limited Brands have adjusted their mind set to their customer’s new rationale and no amount of tinkering with operations will overcome that fundamental flaw in their business strategy. Until new thinking prevails, about the best the best you can say about the companies is that they will remain in a state of what Porter describes as “strategic mediocrity” which leads to equally mediocre investments.