Gap's New CEO And The Road To Recovery: Why This Analyst Is Cautiously Optimistic About The Brand's Future

Telsey Advisory Group analyst Dana Telsey reiterated a Market Perform rating on the shares of Gap Inc GPS with an unchanged price target of $11.

The analyst believes the new CEO Richard Dickson has experience with brand management and operations, making him a candidate that could drive improved growth and profitability at Gap.

The analyst noted CEO highlighted the need to improve consistency across the organization, in terms of fashion, fit, marketing and merchandising to more reliably meet the needs and expectations of its customers.

CEO Dickson called ON (Old Navy) the crown jewel of the portfolio with the biggest opportunity for growth.

The brand's recent inconsistency, he noted, was due to external factors such as COVID and supply chain disruptions, as well as internal factors such as a well-intended but poorly-executed sizing inclusivity roll out.

However, he noted that those external factors are behind and that the business is now leading with conviction under new leadership, with some operational efficiencies beginning to bear fruit.

Dickson also sees Athleta as an exciting opportunity given the brand's positioning as a top five player with strong customer relationships in a $90 billion segment that is increasingly becoming a lifestyle rather than an apparel category.

Gap's second quarter results were a bit of a mixed bag, with EPS well ahead of expectations driven by better expense control and a sizable tax benefit, while sales and gross margin both fell short.

Within the topline, Gap, BR, and ON all declined year-over-year and came in below consensus forecasts highlighting the ongoing challenges each brand faces in the current macro-operating environment, noted the analyst.

While new CEO Dickson has only been on the job for a few weeks, it is clear that there is work to be done across the brand portfolio in the analyst's view.

The analyst remains cautious on the ability to drive improved performance near-term in a challenging environment. The price target assumes an 11.7x multiple on the analyst's two-year forward EPS estimate of $0.94.

Price Action: GPS shares are trading lower by 2.68% at $10.90 on the last check Wednesday.