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This must be the perfect time to rank the retailers. All 4 of these companies have recently filed their 10-K for 1998.

Gap is firing on all cylinders. The company grew net income by 54% while growing total assets by only 19%. That means that each additional dollar invested in the company is more profitable than the last. Nevertheless, Gap's poor showing on the cash-to-debt ratio really drags down its overall score. Considering that diluted shares declined by 2% year-over-year, the company apparently believes its stock is undervalued enough to buy back shares rather than pay down the debt. Such aggressive financial management is great if all works out as planned, but can be disasterous if company performance hiccups.

Gap Inc. Abercrombie American Eagle Limited
Current Period Year-ago PeriodYear-over-Year Current Period Current Period Current Period
FY '98 (1/30/99FY '97 (1/31/98 Growth FY '98 (1/30/99) FY '98 (1/30/99FY '98 (1/30/99)
Income Statement . . .
Sales 9,055 6,508 39.1% 816 588 9,347
Cost of Goods S 5,318 4,022 32.2% 472 353 6,349
Net Income 825 534 54.4% 102 54 314
Shares Outstand 603 615 -2.0%

Balance Sheet . . .
Cash & Equivale 565 913 -38.1% 164 85 870
Current Assets 1,872 1,831 2.2% 218 155 2,318
Short-term Debt 91 85 7.0% 0 0 100
Current Liabili 1,553 992 56.6% 122 60 1,248
Long-term Debt 497 496 0.1% 0 0 550
1 1 1Competitors
Margins & Ratios . . .
Gross Margins 41.3% 38.2% 3.1 42.2% 39.9% 32.1% 38.0%
Net Margins 9.1% 8.2% 0.9 12.5% 9.2% 3.4% 8.4%
Cash-to-Debt 0.96 1.57 -38.8% No Debt! No Debt! 1.34 1.72
Net Cash -22.0 332.4 N/A 163.6 85.3 220.3 156.4
Fool Flow Ratio 0.89 1.01 -11.7% 0.45 1.16 1.26 0.96

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Ranking Rule Makers

1) Brand Points (0-1) 3) Financial Dire Points (0-3)
Familiarity 1 Sales Growth 3
Openness 1 Gross Margins 3
Optimism 1 Net Margins 3
Legitimacy 1 Shares Outstandin 3
Inevitability 1 Cash-to-Debt 0
Solitariness 1 Fool Flow Ratio 3
Humor 1 Expansion Potenti 3
Subtotal 7 Subtotal 18

2) Financial Loca Points (0-2) 4) Monopoly Statu Points (0-4)
Mass Market Habit 1 Gross Margins 2
Gross Margins 1 Net Margins 2
Net Margins 1 Net Cash 0
Cash-to-Debt 0 Fool Flow Ratio 2
Fool Flow Ratio 2 Convenience 4
Your Interest 2 Subtotal 10
Subtotal 7
5) Your Enjoyment 1

Total Score 43 Second Tier

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Dear TMF Verve,

Nice post. I was just curious - What was Gap's RM ranking in previous years?

Has it risen or fallen?


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What was Gap's RM ranking in previous years? Has it risen or fallen?

Hey LeiLei,

I'm going to take the lazy man's approach to answering your question. I have last year's Gap annual report in front of me. One of the key metrics that has deteriorated for the company over the past two years is the cash-to-debt ratio. Meanwhile, the Flowie has improved a bit. Here are those two key balance sheet ratios for the past 3 years:

FY'98 FY'97 FY'96
Cash-to-Debt 0.96 1.57 15.5
Flowie 0.89 1.01 0.96

The most exciting thing on the income statement side has been the acceleration of sales growth:

FY'98 FY'97 FY'96
Sales Growth 39% 23% 20%

So, I believe the increased debt has been justified by the awesome sales growth -- all while keeping tight control of its working capital (as evidence by the steady-to-declining Flowie). Of course, in the years ahead, we'd like to see the flush cash from operations pay down that debt. If Gap can't do that, then there's a problem.

Okay, now let me try to veer this discussion back to your original question. Because of Gap's historically low gross and net margins, the company has never scored overly high on the Rule Maker system. And, the recent plummeting of the cash-to-debt ratio has only worsened the situation. Compared to today's score of 43, my guess is that Gap scored higher on the system following FY'96 and lower following FY'97.

It all goes to show that these scores are a starting point for analyzing companies. The numbers tell much or the story, but it's not all wrapped up in the total score. The individual ratios and margins deserve close inspection, as well.

Hope this helps. Maybe when I get a chance, I'll run the old numbers on Gap to test my above guestimates. (You got me kinda curious.)

Fool on,
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Dear Matt,

Thanks for the response. I wanted to know Gap's score only because I wanted to compare it to that of Abercrombie and Fitch. I understand that the numbers are important, and I believe that Gap is an excellent company. I think that the debt has paid off, as proven by the stellar growth rates.


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Matt, Nice post thanks. (your columns lined up as well.) I am concerned about the cash to debt problem particularly when compared to ANF and AEOS (no debt for either) In fact both companies have better net margins than GPS as well. I think including LTD in the analysis made GPS look more like a monopoly than it really is. I'm not selling however. If GPS expands well and sales go up and the cash generated is managed appropriately it can improve. They need to be looked at carefully each quarter. I'll bail if I don't see improvement.

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Hi Fools!

I've found this thread interesting reading because
I just recently ran Abercrombie & Fitch (ANF) through
the RM spreadsheet (compared to The Gap and American

I came up with a total score of 47 (second tier but
almost first tier!) for ANF and it beat The Gap
on just about every count: Gross margin, Net Margin,
Cash-to-Debt, Net Cash, and Fool Flow Ratio. (I would
post the spreadsheet but I'm not sure how to...).

Any thoughts on ANF dethroning GPS in the near future?
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