Gap is in 'early innings of a turnaround' after earnings beat, analyst says

By Steve Gelsi

Jefferies raises Gap's target price to $28 a share from $17 a share

Gap Inc.'s stock and corporate bonds were in rally mode on Friday after the retailer's revenue and profit beat Wall Street estimates and led Jefferies analyst Randal J. Konik to raise his price target on the stock.

Citing the company's stronger-than-expected results as evidence of the "early innings of [a] turnaround" Konik increased his price target for Gap (GPS) to $28 a share from $17 a share.

Gap's stock was up by 13% in early trading on Friday.

While Konik said while the company has chalked up its fifth consecutive quarter of market share gains, Jefferies remains on the sidelines for now with a hold rating.

"Long term, we believe a mix shift toward Old Navy and Athleta should improve the company's margin structure," Konik said. "However, we think there are still risks around Old Navy maintaining its historical growth and margin rates, especially with growing competition."

Positives in the quarter included positive comparable sales for Athleta, Old Navy, Gap, and Banana Republic.

Inventory levels remain under control, as management focuses on maintaining inventory growth below sales growth.

The Gap also increased its outlook for fiscal 2024 sales to rise "slightly" after its earlier view of flat and higher gross margins, with operating income to grow in the mid-40% range from its earlier expectation of low-to-mid teens growth, Konik said.

On the minus side, Konik said Athleta's second-quarter sales view was "soft."

Looking ahead, Konik said he expects investors to pay close attention to Chief Executive Richard Dickson's effort to improve the company's "brand relevance" and its overall product offering.

Separately, Gap Inc.'s bonds mirror activity in its stock on Friday as prices for corporate bonds moved up.

As prices of Gap debt rose, yields on the bonds fell sharply.

Prior to Friday's trades, Gap stock was up 7.7% in 2024, compared to a 9.8% rise by the S&P 500 SPX.

-Steve Gelsi

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05-31-24 0944ET

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