JPMorgan Upgrades Gap, Highlights Old Navy's Recent Success

Shares of Gap Inc GPS look attractive at current levels after underperforming the S&P 500 index by 50% over the past three years, according to JPMorgan.

The Gap Analyst: Matthew Boss upgraded Gap's stock from Neutral to Overweight with a price target lifted from $22 to $30.

The Gap Thesis: Gap's Old Navy brand is standing out during the COVID-19 pandemic as it offers consumers a good value proposition on-par with off-price retailers, Boss said in a note. The brand has seen market share gains across key categories like denim and active as consumers are prioritizing value. Encouragingly, the brand faces an opportunity to win even more share from recent bankruptcies and eventual door closures.

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Meanwhile, management's own "Power Plan 2023" strategy could prove to be conservative. The company is targeting a 10% EBIT margin target by fiscal 2023 and assumes Old Navy and Athleta account for around 70%. The math behind these assumptions assumes roughly break-even EBIT margins at Gap and Banana Republic, mid-teens EBIT margins at Old Navy (consistent with current levels), and high-teens EBIT margins at Athleta.

As such, Boss said buying the stock today implies investors are purchasing an "embedded call option" on the core Gap brand that could benefit from near-term catalysts. Most notably, the promotion with Kanye West for the YZY Gap launch in fiscal 2021 could accelerate adoption. This bullish outlook is further justified if a COVID-19 vaccine helps generate a rebound in workwear apparel.

GPS Price Action: Shares of Gap were trading higher by more than 7.7% at $26.27.

Photo credit: bargainmoose, Flickr