UPDATE: Citi Upgrades Gap To Hold, Raises PT To $25

Citi is upgrading Gap GPS to a Hold from Sell and raising its price target from $18 to $25. Eddie Lampert's 5.8% stake, revealed late Monday, does not erase Citi's concerns about Gap's leverage to rising input costs over 2011/2012, but it does raise prospects for a more transformative way to unlock value, and Citi thinks that puts a floor on the stock here. Mr. Lampert is no stranger to specialty retailing, with long-term stakes in AN, AZO, and SHLD. While his intentions for GPS are not known, it's long been Citi's view that the company's current growth and restructuring initiatives are both too small in scope to drive significant value. A reduction in capex and a more aggressive buyback posture seems like a feasible course over the medium term, in Citi's view. Looking to 2011, Citi thinks Gap can conservatively guide to flat EPS: Citi is raising its estimate to $1.90 from $1.79, 2% EPS growth. 4Q10, to be reported next week, should again demonstrate that the company has some levers to drive cost reductions. GPS will likely have challenges passing along higher input costs in 2011, and Citi is assuming a (-200) bps reduction in gross margin for the year. GPS closed Tuesday at $22.78