The Gap's October Sales Improve As The Weather Cools

Shares of Gap Inc (NYSE: GPS) were trading lower by nearly 2 percent Tuesday even though the company reported better-than-expected comps for the month of October along with an updated guidance.

Following the company's sales data, Kelly Halsor of Buckingham Research reiterated a Neutral rating on Gap's stock but raised her price target to $25 from $23.

The analyst noted that Gap's third quarter earnings per share guidance of $0.59 to $0.60 exceeded her estimate of $0.54. The better-than-expected outlook was attributed to upside in gross margin in the quarter and continued comp strength at Old Navy.

"Despite a difficult retail environment, GPS was able to deliver upside against its plan, largely due to strength at Old Navy (Oct +3% vs. +2% est) as overall traffic in October actually strengthened relative to Sept, as well as from strong merchandise margin gains, partly due to the impact of the Fishkill DC fire," the analyst wrote.

Halsor did state that Gap still has "plenty of wood to chop" at its core Gap stores and Banana Republic, but Old Navy's improving health and lean inventory levels can limit downside to the company's EPS in the bottom half of 2016.

Nevertheless, Halsor felt that a Neutral rating is still justified as the company's path towards a sustained and healthy earnings growth is yet to be seen and there are no signs of the competitive landscape easing.

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