NEW YORK (CNN/Money) - What a difference a year makes for the Gap.

Last year at this time, sales were plunging at the company's flagship stores as well as at Old Navy and Banana Republic and the company was on track to record its second consecutive quarter of losses. CEO Mickey Drexler was being widely criticized for abandoning the Gap's (GPS: Research, Estimates) focus on basic apparel items like khakis, blue jeans and sweatshirts in favor of leather pants and sparkly T-shirts.

The balance sheet was a mess too, with just $800 million in cash and $1.3 billion in long-term debt. The stock plunged 45 percent in 2001.

Now, the Gap is profitable again. November same-store sales for the company were 9 percent higher than a year ago. By way of comparison, rivals Limited Brands (LTD: Research, Estimates) and Abercrombie & Fitch (ANF: Research, Estimates) both reported declines in stores open at least a year and discount chains struggled in November as well. Drexler left the Gap in September and was replaced by former Disney executive Paul Pressler.

The company's balance sheet, while not totally pristine (more about that later) has improved -- the Gap now has about $2.5 billion in cash. And the stock is up 13 percent year-to-date and about 70 percent since the market hit its low point on Oct. 9.

So is this turnaround for real? "The Gap deserves credit for stabilizing the business and getting momentum going the right way," says Kindra Devaney, an analyst with Fulcrum Global Partners, a research boutique based in New York. "But the initial improvements are partly due to easy comparisons."

In other words, it's hard to not show positive gains considering that last year was so abysmal. Last November, for example the Gap reported a 25 percent decline in same-store sales. Sales at Old Navy stores were down a whopping 33 percent. Nobody was buying performance fleece.

"There's low hanging fruit this quarter, next quarter and in the first half of 2003. But can they grow beyond that?" asks Devaney. She's not so sure, saying that increased competition from discount chains Wal-Mart and Target as well as from lower-end department stores like Kohl's will make future growth a challenge for the company. Devaney does not own the stock and Fulcrum does not do any investment banking.

Devaney says that even though the Gap is clearly doing much better now than it was last year, this might be reflected in the stock price already. The stock, at about 27 times estimates for its next fiscal year (which ends in Jan. 2004), trades at a big premium to other apparel retailers. Abercrombie & Fitch and Ann Taylor (ANN: Research, Estimates) both trade at about 11 times fiscal 2004 earnings estimates.

Jennifer Black, an analyst with Wells Fargo Securities, argues that the company should be valued on a price-to-sales basis, since earnings for the Gap are near a trough level. The Gap looks more attractive this way, with a market value slightly less than its trailing twelve-month sales of $13.9 billion. Typically, stocks that trade at a discount to last year's sales are considered bargains.

Black thinks that it won't take much for the company to beat expectations for the current quarter, which ends in January. And that can boost the stock.

"People forget how ugly the Gap was a year ago. They couldn't get rid of stuff after the fifth markdown," she says, adding that the company has been able to increase sales this year without cutting prices as much because of the renewed focus on the basic apparel products that made the Gap a success. Black does not own shares of the Gap and Wells Fargo has not performed investment banking for the company.

Still, despite the large gains in same-store sales for the company, overall sales for the Gap are only expected to increase 4.2 percent in its next fiscal year. That means the company is going to need to cut costs aggressively in order to boost profits. And it's not as if the Gap is without other risks.

Andrew Pratt, manager of the Montgomery Growth fund, which owns 204,000 shares of the Gap, says that one concern the company still has to address is cannibalization. Old Navy and Gap aren't all that different from a product or price perspective, he notes, so they could eat into each other's sales prospects.

Right now, with both the Gap and Old Navy sales recovering, this isn't a big problem. But over the long-term, sales could be affected at one of the two chains if customers can't differentiate between the two brands.

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The balance sheet still needs to be cleaned up as well. Even though the Gap's cash level has increased, so has long-term debt, which stood at about $2.9 billion as of the end of September. Making matters worse, the company's debt is rated below investment grade, or as junk, by Moody's and Standard & Poor's. Pratt says he thinks the company should sell some underperforming stores and slow its expansion pace in order to address the balance sheet issues.

Angela Kohler, manager of the Federated Large Cap Growth fund, owned the stock earlier in the year and sold it before its run up. She said she still loves the company and thinks the turnaround is legitimate. But she's waiting for the stock to pull back from current levels before buying again.

"I'm looking for an opportunity. If overall holiday sales are poor and the stock goes down with the retailing group, I'd buy again," Kohler says.

So even though the Gap looks like it's heading in the right direction, that doesn't mean now is the best time to buy the stock.