Can The Gap Pick Up Market Share Up For Grabs By Department Store Closings?

Citing a washed out valuation, Oppenheimer equity research analyst Anna Andreeva has upgraded Gap Inc (NYSE: GPS) to Outperform and set a $28 price target.

Old Navy Driving Growth Story

As Old Navy continues to perform extremely well and with improved gross margins across all Gap brands, Andreeva believes earnings estimates for the remainder of the year are too conservative.

With J C Penney Company Inc (NYSE: JCP), Macy’s Inc (NYSE: M) and Sears Holding Corp (NASDAQ: SHLD) closing 215 stores combined, this could create an opportunity for over $350 in women’s apparel sales for Gaps, according to Andreeva. Additionally, the report states the closing of 13 mall-based retailers has eliminated approximately 500 million in specialty women's apparel. If Gap is able to capitalize on just 5–10 percent of the 500 million, this would add 50–100 basis points to their comps valuation.

Gap is making strides with their production speeds. “Gap is catching up with data-driven responsive demand (testing, hindsighting season prior to production); with divisional margins ~600 bps below peaks, profitability should improve even if comps stay negative,” Andreeva said.

The report also highlighted that Gap is basically getting Banana/Athleta sales for free. Athleta has posted HSD+ sales growth over the last four quarters, which makes it a premium valuation and helps drive the $28 price target.

Overall, Andreeva believes the stock is not receiving enough love as Gap was trading at $22.61, at the time of publication.

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