Gap Inc., on the Bright Side
Gap Inc. stock closed up 3.1 percent Tuesday after Barclays upgraded the retailer to “overweight” from “equal” weight, as the company continues to trim inventories.
Barclays also assigned a $13 stock price target to Gap Inc. An overweight rating suggests that the stock is worth more than it’s currently trading at while an equal weighting suggests the stock will continue to be in line with the average stock performance in the sector.
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The stock closed Monday at $10.30, rose to $10.90 Tuesday morning on the Barclays report, and by the afternoon settled in at $10.60. It’s been as high as $15.49 this year.
During the first quarter of this year, all four Gap Inc. divisions — Gap, Banana Republic, Old Navy and Athleta — continued to lose market share. But the company did manage to sharply narrow its net and operating losses from the year before, and some near-term bottom line improvement seems probable.
Last month, Gap Inc. disclosed two key appointments. Richard Dickson, a former Mattel and Jones New York executive, became president and chief executive officer of Gap Inc., a position that had been vacant for a year. Also, Chris Blakeslee, formerly of Alo Yoga, became president of the Athleta division.
Barclays said it believes Dickson “has strong brand-building experience from his years overseeing Barbie, Hot Wheels and Fisher-Price as chief operating officer of Mattel, while also bringing to the table apparel experience from his time as CEO of brands at Jones Group.” Barclays also noted that Blakeslee was most recently president of “high-growth” athleisure company Alo Yoga.
Barclays upgraded American Eagle Outfitters, Tapestry and Bath & Body Works as well on Tuesday in its positive perspective on U.S. specialty retail, apparel and e-commerce. But Wall Street didn’t lift those stocks nearly as much as Gap’s.
“We upgrade AEO, BBWI, GPS, TPR to overweight, notably for early-stage value investors seeking more beta. To be clear, sales remain under pressure currently, reflecting still-high inflationary headwinds that have only recently begun to ease in essential categories, combined with the latent impact on demand from Fed hikes,” Barclays indicated in its report, which was penned by analysts Adrienne Yih and Paul Kearney, along with Angus Kelleher-Ferguson and Michael Vu.
Barclays cited the specialty retailers’ “improving sales-to-inventory growth metrics, as well as company-specific drivers to return to growth in 2024 despite what we expect could be lowered top-line sales guidance for the second half of 2023. Promo checks at AEO, BBWI, and TPR were all deeper in calendar year 2Q23, with GPS scoring flat in 2Q23. While we raise our price targets over a 12-month horizon, we believe there could be risk to 3Q23 and 2H23 sales for AEO, BBWI and GPS, with potential EPS support from freight and promo recapture. We expect any risk to North America for TPR to be offset by Asia/Greater China upside.”
Specifically on Gap, Barclays sees “material potential for margin upside as GPS laps promotional activity with much cleaner inventory levels and recaptures freight headwinds. As the year progresses, the headwind on cotton and input cost inflation is expected to turn into a 2H23 tailwind, coupled with the implemented cost reduction efforts on SG&A. The need for ongoing promotions suggests sales growth will remain firmly in negative territory, but we believe lean inventory can offset sales deleverage.”
Barclays indicated that Gap Inc. in the first quarter of this year posted positive sales-to-inventory growth and for two quarters showed improved gross margin return on investment while its operating margin ROI has worsened for seven consecutive quarters.
“While the margin recapture on significantly cleaner inventory levels is likely to bolster EPS results, we believe there remains significant work to be done to stabilize the business to become more responsive to consumer demand signals, eliminating redundancies, optimizing marketing spend, and ultimately returning the brands to healthy organic growth trajectories…Our promotional checks suggest negative comps may occur at all four brands in 2Q23, but we note that promotions at both Gap and Old Navy appear to be flat to prior year. While this is not a sign of top-line recovery by any means, we do believe that severe curtailment of inventory should result in support to margins, along with improved freight.”
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