Shares of Gap Inc. (NYSE: GPS) surged 20
percent after it
announced it will spin off its best performing brand, Old Navy, to shareholders in 2020, leading a few Wall Street analysts to
boost their price estimates for the stock.
Gap also announced a major restructuring plan that will see the closure of 230 stores – about 30 percent of the total.
Management hopes to double its online sales, already healthy and growing, from 20 percent of its business to 40 percent after the
store closures. The yet-to-be-named company that will remain after the spin-off will include, in addition to Gap stores, Banana
Republic, Athleta, Hill City and Intermix.
But analysts remained less enthusiastic than the market on Friday, with most keeping ratings expecting market performance or
remaining neutral on the stock. And while Old Navy has been the “crown jewel” of Gap, as one analyst put it, it didn’t have the
best fourth quarter.
The Analysts
Wells Fargo analyst Ike Boruchow had one of the bigger target price increases, going from $26 to $31, while reiterating a Market
Perform rating on the stock.
MKM Partners analyst Roxanne Meyer is Neutral on Gap and raised her price target from $30 to $33, despite lowering EPS estimates
from $2.65 to $2.50.
KeyBanc Capital Markets analyst Edward Yruma has Gap rated Sector Weight with no price target.
UBS analyst Jay Sole remains Neutral on Gap, with a price target of $26.50.
Bank of America Merrill Lynch’s Lorraine Hutchinson reiterated an Underperform rating on the stock with a $24 price target.
Nomura Instinet senior equity analyst Simeon Siegel
said on CNBC’s “Squawk Box” the move to split was about getting the stock price higher, because the different brands actually
make sense as one company.
The Theses
Wells Fargo
Boruchow said Old Navy has long been “the crown jewel” for the combined company noting its strength in quickly reacting to
trends while remaining attractive to the value-minded clothing shopper.
But in the fourth quarter, Boruchow noted Old Navy had flat comparable store sales – though pointing out its margins are strong
relative to other retailers.
“All in, we believe that Old Navy is one of the better retail concepts out there today (in spite of occasional execution
missteps), and believe a spin off could provide meaningful value to investors,” Boruchow wrote to investors.
MKM
Meyer agreed that the spin-off is strategically positive for shareholders.
“We believe Old Navy on its own will garner a sizable premium vs. NewCo, with fundamentals that are coveted across the retail
landscape,” Meyer wrote.
KeyBanc
“We think that competitive overlap with Old Navy likely prevented both concepts from broadening their target markets, and as an
independent company, Old Navy could be poised to accelerate growth,” Yruma wrote. Old Navy, he said, is “one of the most attractive
concepts in apparel retail.”
UBS
The market may be right in pushing the stock’s value so high, but the fourth-quarter growth issue needs to be solved to keep it
up there, Sole said.
“This could cause the market to take a more cautious view if trends don't improve soon,” he wrote.
Bank of America
Hutchinson also noted Old Navy comparable store sales were flat, however, well below BofA’s growth estimate and that holiday
traffic was slow.
“The international and ecommerce businesses are growing rapidly, but the mature domestic business remains much more important to
earnings for the foreseeable future, and consistent execution at all brands concurrently has been a problem,” Hutchinson wrote.
Gap's stock traded around $29.72 per share at time of publication, up 16.8 percent.
Related Links
The Gap
Is Splitting; Old Navy To Become Standalone Public Company
Surge In Gap
Shares, Trade Deal Optimism Help Boost Market Sentiment
Photo credit: bargainmoose, Flickr
Latest Ratings for GPS
Date |
Firm |
Action |
From |
To |
Mar 2019 |
Deutsche Bank |
Maintains |
Hold |
Hold |
Feb 2019 |
Credit Suisse |
Maintains |
Neutral |
Neutral |
Jan 2019 |
Goldman Sachs |
Downgrades |
Neutral |
Sell |
View More Analyst Ratings for
GPS
View the Latest Analyst
Ratings
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