Newly confident consumers are falling into the Gap

But they are more reluctant to drop their money at Starbucks.

By Jonathan Berr Aug 17, 2012 12:12PM
Shares of Gap (GPS) are trading up Friday after the apparel retailer beat Wall Street expectations and the company's own forecast. Investors were so impressed with the earnings that they are overlooking the lackluster guidance.

Net income at the San Francisco company surged 29% to $243 million, or 49 cents a share, from $189 million, or 35 cents a year ago as domestic sales surged and the company held inventory expenses in check. Sales rose 6% to $3.58 billion. The results beat the 48-cent average estimate of analysts surveyed by Bloomberg and the 47 to 49 cent forecast the company gave earlier this month.

Gap raised its fiscal year 2012 forecast to $1.95 to $2 per share from a May forecast of $1.78 to $1.83. That's below the $2.08 average estimate of Wall Street analysts. Ordinarily, investors would punish a stock for such a "miss," but Lazard's Jennifer Davis is quoted by Bloomberg as saying "the full-year guidance is conservative."

That raises some interesting questions. For instance, why are consumers willing to spend $88 on Gap's Academy blazer and not $12.95 on a pound of Starbucks Willow blend coffee

Starbucks (SBUX) CEO Howard Schultz said his company, which recently posted disappointing results, faced "significant global economic and consumer challenges." GAP CEO Glenn Murphy struck a more optimistic note, saying customers responded well to our product offerings across our brands." Though these two businesses are vastly different, they are in the the same economy, no?

Adding to the confusion was the recent release of data that seeks to measure the confidence or lack thereof of the U.S. consumer. A week ago, Gallup reported that from Aug. 6 to Aug. 9  its polling data showed that consumer confidence reached a "low point" that may have been caused by July's disappointing jobs report. The tone was pretty pessimistic, even though Gallup noted that confidence recovered later in the week. 

"Over the past two months, Americans' confidence in the economy has declined, and much of the positive momentum seen earlier in the year has been lost, reflecting the current economic situation," according to Gallup.

Today, though, is a new day.

Consumer confidence unexpectedly surged in August, hitting a three-month high.  Investors closely watch the Thomson Reuters/University of Michigan consumer sentiment survey for any signs of future economic growth. Experts quoted by the media often struggle to make sense of it all.

"Consumers are feeling a little better about the current economy, though a little more concerned about the outlook," Gary Thayer, chief macro strategist at Wells Fargo Advisors, told Reuters.

So, I guess consumers may stay bold, confident Gap shoppers for now but still have the potential to become the frightened bunnies patronizing Starbucks at the drop of a hat. In other words, experts are as baffled by the twists and turns of the economy as anyone else.

The moral of this story is that investors need to take conventional wisdom about consumers or anything else with a grain of salt because it's ... so conventional.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr.


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.