Gap Inc. (NYSE: GPS) has been struggling in the last few years, fading in popularity since its heyday in the nineties. The company is almost 40-years-old, and with proper management, it could be headed back to the top. Is Gap a fit for your portfolio?

1. Gap management recently declared a quarterly dividend of eight cents per share, the second dividend payable this year.
2. Gap is a sponsor of the (Product) RED campaign, donating half of the profits from its (RED) logo merchandise. Positive customer response to this could impact the bottom line.
3. Gap is expanding internationally with several franchise agreements in the Middle East and Asia. New franchise agreements will open stores in Saudi Arabia and Turkey.
4. Net sales rose to $7.23 billion in the first two quarters of 2007, up $81 million from the same quarters last year.
5. New brand Piperlime launched in 2006, expanding Gap Inc. into the shoe sector. The store is currently only online and boasts free shipping and free returns.

1. Two years of across-the-board declines is a major problem. Gap Inc. has consistently misread consumer tastes.
2. There has been some negative backlash from the (Product) RED campaign. Critics contend that sponsors such as Gap profit too much. This detracts from the otherwise good press from the charity campaign.
3. Since November 2006, four out of eight research firms have downgraded Gap stock. The experts don't seem to expect a turnaround anytime soon.
4. Gap's trailing P/E ratio is 20.43, soaring above competitors Abercrombie & Fitch (NYSE: ANF) at 17.13 and American Eagle Outfitters (NYSE: AEO) at 14.29. Gap investors are paying more for each dollar of return on an investment than others invested in similar clothing retailers.
5. Gap's second quarter 2007 revenue growth was -0.8 percent over last year. Compare that to 22.1 percent for Abercrombie & Fitch and 16.1 percent for American Eagle Outfitters.

Gap Inc. is one of the larger retailers in the United States. The company has built its brand on casual styles. Over the years, it has expanded with upscale Banana Republic and discounter Old Navy, among others. Is it time for you to try on Gap's stock?

1. Customers can use Gap's new Visa card in other stores, giving the company access to data on customer spending. They can use the info to tweak their merchandise toward customers' needs.
2. In 2007, CNBC reported that Gap hired investment firm Goldman Sachs to assess the need for big changes, like selling the company. If purchased, they may get a premium over the current share price.
3. Old Navy is a very valuable business by itself (it raked in 48 percent of company net sales in the second quarter of 2007) and could be worth a ton if it becomes a spin off.
4. The founding family still owns more than 20 percent of the company and has its best interest in making their investment grow.
5. Gap Inc.'s balance sheet looks amazing -- total stockholder equity tops $5 billion and the company is sitting on over $2 billion in cash (and cash equivalents).

1. The company is facing massive competition from specialty stores (Ann Taylor and Chico's), newcomers (Abercrombie & Fitch and American Eagle), and department stores.
2. Comparable-store sales in the second quarter of 2006 fell 5 percent, and were down another 5 percent the second quarter of 2007. Each store is generating less revenue.
3. Gap Inc. closed down the new store concept Forth and Towne earlier this year. Management cannot decide whether to start over or build on existing brands.
4. I don't believe new CEO Glenn Murphy will be able to save Gap. Murphy is the former CEO of a Canadian drug store -- selling trendy clothing is a lot more difficult than selling mouthwash.
5. Corporate heads have abandoned the younger set, opting to concentrate on 24- to 34-year-olds. This kind of indecisiveness stunts growth.

Sources:

gapinc.com; finance.yahoo.com; msnbc.msn.com; usatoday.com; money.cnn.com fool.com; nytimes.com