Risk Outweighs Reward In Gap Shares, According To Oppenheimer

Despite a nearly 50-percent surge throughout 2017, at least one Wall Street analyst isn't confident that Gap Inc (NYSE: GPS)'s momentum will continue.

The Analyst

Oppenheimer's Anna Andreeva downgraded Gap from Outperform to Perform with a price target lowered from $33 to $30.

The Thesis

One of the requirements for the retailer's stock to continue growing is sales consistency across all three of its major brands — Gap, Old Navy and Banana Republic — Andreeva said in the downgrade note. (See Andreeva's track record here.) 

The last time all three units reported a positive comp was in 2012, and the stock responded with a 2-3x multiple expansion, the analyst said. The stock has already expanded by the same 2-3x factor since January 2017, but the core Gap branded hasn't comped positive in over a year, according to Oppenheimer. 

The Old Navy and newer Athleta brands are both expected to see continued upside, but the Gap brand will continue to struggle — and a recovery at Banana Republic continues to get pushed out, as it has been showing negative comps since the fourth quarter of 2014, Andreeva said. 

Finally, the analyst's "bull case" EPS estimate of $2.20 to $2.25 implies low single-digit comps and slight gross margin expansion in which a 15-16x multiple is warranted. But the company could also show flat EPS growth from 2017, which would warrant a lower 12x-13x multiple and imply a valuation in the mid-to-high $20's, according to Oppenheimer. 

Price Action

Shares of Gap hit a new 52-week high of $34.41 Thursday morning before giving up the gains and closing down 3.15 percent at $33.18. 

Related Links:

Rotation, Rotation, Rotation: Value Is The New Tech

Jeff Macke Talks Walmart's E-Commerce Share, Retail Misconceptions

Photo courtesy of Gap.