For The Gap, Is Old Navy Success Enough To Keep The Ship Afloat?

Led by strength in its Old Navy brand, Gap Inc GPS posted first-quarter comps increases with beats in sales and earnings-per-share Thursday.

But it wasn’t enough to impress Morgan Stanley.

“We commend GPS for posting a solid 1Q result in a very tough environment, but one quarter does not change the long-term direction of the business,” analyst Kimberly Greenberger wrote in a Friday note.

Greenberger’s concerns aren’t few: declining store traffic, reduction in e-commerce intermediaries, deteriorating brand health, deflation in apparel prices and dropping store margins don’t paint a pretty picture. The analyst also regards the “disappointing” Gap and “struggling” Banana Republic lines as having “lost relevance with consumers.”

“These are not easily fixable near-term, leaving us confident GPS will continue to cede share like the department stores and teen retailers,” she wrote.

Talking In Numbers

Considering diminished capacity for share buybacks and for savings in selling, general and administrative expenses (SG&A), Morgan Stanley reiterated an Underperform rating with a $20 price target.

Greenberger warned against trials in the second half of the year, with challenging sales comparisons and margin risk heightened by expectedly flat ending inventory in the second- quarter. These factors assume a predicted 1- to 2-percent sales decline, which, if worse than expected, could yield additional downside.

At the time of publication, Gap was trading down 3.19 percent at $22.45.

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