Things To Like, Things To Watch At The Gap

Gap Inc GPS impressed investors with a second-quarter earnings beat, but for many the retail sector remains a big question mark.

Deutsche Bank's Paul Trussell maintains a Hold rating on Gap's stock with an unchanged $24 price target, noting that management should be applauded for a strong earnings report but the company isn't out of the woods yet.

Gap's earnings report showed a "meaningful improvement" in the core-Gap brand as comp sales fell just 1 percent, marking an improvement from a 4 percent decline in the prior quarter, Trussell noted. Old Navy's comps accelerated by 300 basis points on a two-year stack basis while Athleta was a strong performer as sales for the 'other brand' segment rose 15.5 percent versus 13.5 percent in the first quarter.

However, the promotional environment that has plagued the retail sector as of late is expected to remain in place and the Old Navy brand will face "meaningfully tougher" comparisons in the coming quarters, Trussell said.

While the company did report a better than expected gross profit margin in the second quarter, comparisons for the back half of 2017 will become "more challenging," the analyst stated. Specifically, the company would lap expansions of 198 basis points in the third quarter and 105 basis points in the fourth quarter.

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