Analysts Cheer Old Navy Split, But Gap Still Has Some Work To Do

Shares of Gap Inc. GPS surged 20 percent after it announced it will spin off its best performing brand, Old Navy, to shareholders in 2020, leading a few Wall Street analysts to boost their price estimates for the stock.

Gap also announced a major restructuring plan that will see the closure of 230 stores – about 30 percent of the total. Management hopes to double its online sales, already healthy and growing, from 20 percent of its business to 40 percent after the store closures. The yet-to-be-named company that will remain after the spin-off will include, in addition to Gap stores, Banana Republic, Athleta, Hill City and Intermix.

But analysts remained less enthusiastic than the market on Friday, with most keeping ratings expecting market performance or remaining neutral on the stock. And while Old Navy has been the “crown jewel” of Gap, as one analyst put it, it didn’t have the best fourth quarter.

The Analysts

Wells Fargo analyst Ike Boruchow had one of the bigger target price increases, going from $26 to $31, while reiterating a Market Perform rating on the stock.

MKM Partners analyst Roxanne Meyer is Neutral on Gap and raised her price target from $30 to $33, despite lowering EPS estimates from $2.65 to $2.50.

KeyBanc Capital Markets analyst Edward Yruma has Gap rated Sector Weight with no price target.

UBS analyst Jay Sole remains Neutral on Gap, with a price target of $26.50.

Bank of America Merrill Lynch’s Lorraine Hutchinson reiterated an Underperform rating on the stock with a $24 price target.

Nomura Instinet senior equity analyst Simeon Siegel said on CNBC’s “Squawk Box” the move to split was about getting the stock price higher, because the different brands actually make sense as one company.

The Theses

Wells Fargo

Boruchow said Old Navy has long been “the crown jewel” for the combined company noting its strength in quickly reacting to trends while remaining attractive to the value-minded clothing shopper.

But in the fourth quarter, Boruchow noted Old Navy had flat comparable store sales – though pointing out its margins are strong relative to other retailers.

“All in, we believe that Old Navy is one of the better retail concepts out there today (in spite of occasional execution missteps), and believe a spin off could provide meaningful value to investors,” Boruchow wrote to investors.

MKM

Meyer agreed that the spin-off is strategically positive for shareholders.

“We believe Old Navy on its own will garner a sizable premium vs. NewCo, with fundamentals that are coveted across the retail landscape,” Meyer wrote.

KeyBanc

“We think that competitive overlap with Old Navy likely prevented both concepts from broadening their target markets, and as an independent company, Old Navy could be poised to accelerate growth,” Yruma wrote. Old Navy, he said, is “one of the most attractive concepts in apparel retail.”

UBS

The market may be right in pushing the stock’s value so high, but the fourth-quarter growth issue needs to be solved to keep it up there, Sole said.

“This could cause the market to take a more cautious view if trends don't improve soon,” he wrote.

Bank of America

Hutchinson also noted Old Navy comparable store sales were flat, however, well below BofA’s growth estimate and that holiday traffic was slow.

“The international and ecommerce businesses are growing rapidly, but the mature domestic business remains much more important to earnings for the foreseeable future, and consistent execution at all brands concurrently has been a problem,” Hutchinson wrote.

Gap's stock traded around $29.72 per share at time of publication, up 16.8 percent.

Related Links

The Gap Is Splitting; Old Navy To Become Standalone Public Company

Surge In Gap Shares, Trade Deal Optimism Help Boost Market Sentiment

Photo credit: bargainmoose, Flickr