Analysts React To Gap's Q3 Earnings Beat, Target Taking Market Share From Old Navy

Gap Inc GPS shares are moving higher one day after reporting a third-quarter earnings beat, despite seeing all three of its main segments deliver negative comps.

Wells Fargo

With Gap’s third-quarter outlook and CEO departure pre-announced earlier in the month, analyst Ike Boruchow said little incremental news came out of the company’s earnings report Thursday. 

“Clearly, management was disappointed across the board on the portfolio, with obvious issues with Gap and ON, but also calling out execution issues at Banana Republic, as well as the historically consistent Athleta,” the analyst said. 

Wells Fargo remains cautious on the Gap story given several uncertainties surrounding the business.

“The Gap operation is clearly going through a significant upheaval with little visibility into business trends, profitability, or even the make-up of the company. While 4Q numbers have likely been appropriately rebased, we continue to have fundamental concerns on the story.”

Wells Fargo maintained a Market Weight rating with a $16 price target.

Bank of America Merrill Lynch

Analyst Lorraine Hutchinson is even more cautious on the retailer, reiterating an Underperform rating with an $11 price target.

Gap’s three core brands struggle to drive profitable growth, the analyst said. 

“We expect continued comp declines at Old Navy and merchandise margins remain weak.” 

The planned 2020 spinoff of the brand remains intact, Hutchinson said, adding that she's skeptical the improved transparency that will come from a spinoff is worth the cost.

Webush

Analyst Jen Redding added to the negative sentiment surrounding the Old Navy spinoff, calling it a distraction and saying she's pessimistic about Gap’s upcoming holiday season.

“Being realistic about the challenges ahead into Holiday for Gap, we view the spinoff in addition to the company’s ongoing CEO search as meaningfully distracting, and expect brands to continue to post relative underperformance in the holiday and beyond,” the analyst said. 

Webush maintained a Neutral rating with an $18 price target.

KeyBanc Capital Markets 

Analyst Edward Yruma said third-quarter weakness “likely portends a soft holiday.”

All of Gap’s brands seem to be struggling with a lack of product acceptance, particularly Old Navy, the analyst said, citing challenging traffic and weakness in women’s apparel.

The analyst sees Target Corporation TGT as a threat to Old Navy, and predicts the company will steal market share, as it reported 10%-plus apparel growth in its earnings print this week.

“Target is taking significant share within the value segment,” the analyst said. 

KeyBanc maintained a Sector Weight rating on Gap. 

Morgan Stanley

With respect to Gap’s CEO search, analyst Kimberly Greenberger said she expects the search to take up to three months and that it will be six to nine months until a new CEO is appointed.

Morgan Stanley maintained an Underweight rating with a $14 price target.

Gap shares were trading 3.92% higher at $16.85 at the time of publication Friday. 

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