Gap Analysts Raise Share-Price Targets, Stay Cautious

Apparel retailer Gap reports a stronger-than-expected fiscal second quarter. The analyst community stays cautious.
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Gap  (GPS) - Get Report analysts raised their share-price targets but stayed cautious on the apparel retailer after it reported a narrower-than-expected second-quarter loss and strengthened online efforts during the coronavirus pandemic.

For the quarter ended Aug. 1 the San Francisco company swung to a loss of $62 million, or 17 cents a share, from earnings of $168 million, or 44 cents, in the year-earlier quarter. Revenue fell 18% to $3.28 billion from $4.01 billion.

A survey of analysts by FactSet was looking for a loss of 41 cents a share on sales of $2.91 billion.

"Our strong performance in the second quarter reflects the customer response to our brands, products and experiences, particularly as we’ve rapidly adapted to the changing environment," Chief Executive Sonia Syngal said in a statement.

Gap shares have wavered on Friday. At last check they were 2.5% lower at $16.95. They also have traded as much as 3.3% higher at $17.95.

For the quarter Gap reported that it nearly doubled its e-commerce business year over year.

Comparable sales in the quarter were up 1%, driven by the digital business, which added over 3.5 million new customers in the quarter.

Gap took in some $130 million of second-quarter revenue from selling face masks.

Gross-profit margin was 35.1%, 3.8 percentage points narrower than it was a year earlier, as a result of factors including “increased shipping expense as online sales grew and the company leveraged its stores to fulfill strong online demand,” the company said.

At Bank of America, in a report cited by Bloomberg, analyst Lorraine Hutchinson lifted her rating on Gap to neutral from underperform and her price target to $18 from $10.

She cites expected second-half progress at Old Navy and Athleta.

In the second quarter the Old Navy division’s sales declined 5% overall. Online sales more than doubled while in-store sales fell 36%.

Within Athleta, the athletic-apparel division, second-quarter net sales were up 6%, reflecting an increase in online sales of 74% and a decline in in-store sales of 45%. Athleta comparable sales grew 19%.

Hutchinson called positive the parent’s effort to close stores at Gap and Banana Republic. But she said the costs of that effort are as yet unknown. 

The company said it expected to close more than 225 Gap and Banana Republic stores, net of openings, in 2020.

Deutsche Bank analyst Paul Trussell affirmed a hold rating and raised his target to $19 from $15. The online growth, progress at Old Navy, fatter margins and well-managed real estate create “a powerful turnaround narrative,” he said.

But he wanted more clarity on whether Gap is willing to sell Athleta and on current-quarter trends.

And Wedbush’s Jen Redding affirmed a hold rating and boosted her price target to $17 from $12. She wants to see how the back-to-school season develops and is wary of the continued damage to the industry from the coronavirus pandemic, Bloomberg reported.

Taking into account a number of other price-target changes, Bloomberg pegs the average target at above $16, compared with $13 on Wednesday.

Citi recently doubled its price target on Gap to $24 a share on the strength of the untapped potential of its Athleta brand. The firm values Athleta at about $3.6 billion.

At the end of the second quarter Gap operated more than 3,800 stores in 42 countries.