The market got excited about earnings at Gap (NYSE: GPS), and the stock is up about 3% on an improvement in net earnings. The company's press release said for the "second quarter, which ended August 4, 2007, earnings increased 19 percent to $152 million, or $0.19 per share on a diluted basis, compared with $128 million, or $0.15 per share on a diluted basis, for the second quarter of last year."

A careful look at the numbers, though, shows that cost cutting, which cannot be done indefinitely, was the sole cause of the improvement. In fact, all of the company's divisions are still struggling with sales. Second quarter revenue was down 1% to $3.69 billion, compared with $3.71 billion for the second quarter of last year. Gap made a big deal about improvement in internet sales, but they were only $172 million for the quarter. That's not enough to do much good.

The two big divisions at the company, Gap North America and Old Navy, were both hit with falling sales. Comparable-store sale at Gap N.A. dropped 6% and at Old Navy 9%.

In the first half of the year, the company fired about 1,500 people, but Gap still runs on a razor thin operating margin of 4%. That means even a modest drop in sales in future quarters could put the company into the red. Guidance going forward looked OK, but the economy may be about to hit an unpleasant bump.

Wall Street may like the earnings, but if so, no one is looking around the next corner.

Douglas A. McIntyre is a partner at 24/7 Wall St.