Sales at Gap Inc’s (NYSE:GPS) Old Navy brand are likely to return to pre-pandemic levels faster than expected, according to BofA Securities.
The Gap Analyst: Lorraine Hutchinson upgraded Gap from Underperform to Neutral and raised the price target from $10 to $18.
The Gap Thesis: Although the company recorded an 18% decline in second-quarter sales, its Old Navy and Athleta brands benefited from higher demand for activewear and leisure, Hutchinson said in the Friday upgrade note. (See her track record here.)
Sales were down by 28% at the Gap brand and by 52% at Banana Republic, the analyst said.
While Gap and Banana Republic could continue to struggle in the near-term, Old Navy and Athleta may exhibit strength in the second half of the year, she said.
Hutchinson expressed concern around Gap's plan to “maximize the value of their brands through improved performance, not divestment, throwing water on the Athleta sale bull case.”
Higher shipping costs exerted pressure on the gross margin in the second quarter and could continue to do so in the back half of the year, Hutchinson said.
The company was able to lower payroll and store costs in the second quarter and may achieve further cost savings from the closure of 225 Banana Republic and Gap stores in fiscal 2020, according to BofA.
GPS Price Action: Gap shares were trading 0.63% lower at $17.27 at last check Friday.
Photo by Mtaylor848 via Wikimedia.