Gap Is One Of 2018's 'Most Compelling Specialty Retail Ideas,' Says Bluefin Research Partners

Gap Inc GPS reported a fourth-quarter earnings beat and issued strong guidance in early March, but the stock's performance has remained relatively lackluster. This represents an entry point in a stock that's underappreciated by investors, according to a new sell-side report. 

The Analyst 

Rebecca Duval at Bluefin Research Partners. The firm has no investment rating on Gap.

The Thesis

An improving product assortment at the Gap over the past year has led to improved sales trends, store traffic and conversion activity, Duval said in a Monday report. 

“In fact, the sentiment from our sources was so overwhelmingly positive about the current assortment, pipeline product, current sales trends and cost saving strategies that the retailer has in place for FY18, that we think GPS will be one of the most compelling specialty retail ideas in 2018." 

The improvement was evident in Gap's Q4 earnings beat and improved guidance, Duval said, adding that she expects more beats down the line.

“What’s really exciting to us [are] the prospects for more earnings beat and upside tweaks as FY18 progresses. We think FY17 was just the beginning of a massive operational improvement that is taking shape at the Gap.”

Making up over 46 percent on the company’s sales, Old Navy is "on fire," Duval said. 

Over the last two years, the Gap brand has enacted initiatives intended to meet consumer demands, including a data-driven test and react strategy, more "fashion-forward" features and an inventory management system, according to Bluefin. 

The retailer's cost cuts are just now beginning to pay off, Duval said. 

"Some of the cost-cutting initiatives are more obvious than others, like store closures and headcount reductions," the analyst said. Gap's "less obvious" streamlining activities are underappreciated by investors and are likely to provide further upside to earnings estimates in the second half of the year, she said. 

Price Action

Gap shares were up 0.31 percent at $32.32 at the close Tuesday.

Related Links:

Barron's Picks And Pans: Allergan, Broadcom, Gap And More

KeyBanc Downgrades Gap After Flagship Brand Splits With CEO