On Friday, CFRA raised the price target for Gap (NYSE: GAP) to $25 from $22, while keeping a Hold rating on the stock. The adjustment reflects a modest increase in optimism from the analyst, despite acknowledging the challenges the company faces in terms of growth and market saturation.
The new price target is based on a 12.2 times multiple of the firm's fiscal year 2026 (ending in January) earnings per share (EPS) estimate, which is still below Gap's three-year average forward price-to-earnings (P/E) multiple of 17.2 times. The analyst's decision to raise the target comes after evaluating the company's performance and potential in the current retail environment.
Gap's third-quarter earnings surpassed consensus estimates, reporting normalized EPS of $0.72 compared to the expected $0.59. This figure was $0.14 higher than what was anticipated by the market. Revenue also exceeded expectations, coming in at $3.83 billion against the forecasted $3.77 billion. This performance was $21 million above what analysts had estimated.
The breakdown by brand showed varying results for the quarter. Old Navy's comparable sales remained unchanged year-over-year, Gap brand sales increased by 3%, Banana Republic saw a decline of 1%, and Athleta enjoyed a 5% rise. The company's gross margin for the quarter expanded by 140 basis points year-over-year to 42.7%, driven by a 90 basis points expansion in merchandise margin and a 50 basis points leverage from reduced rent, occupancy, and depreciation costs.
Looking forward, Gap anticipates full-year revenues to increase by 1.5% to 2.0% and expects gross margin to expand by 220 basis points. Despite this positive outlook and better-than-expected performance this year, the CFRA analyst has chosen to maintain a Hold rating on Gap shares. The analyst cites "tougher comps moving into FY 26 and little growth aspects moving forward" as the primary reasons for not shifting to a more bullish stance.
In other recent news, Gap Inc (NYSE:GAP). has seen a series of positive evaluations from BMO Capital Markets, TD Cowen, and Evercore ISI, following strong earnings and sales performance. BMO increased its price target for Gap from $23.00 to $25.00, maintaining a Market Perform rating. This adjustment was based on a robust earnings per share (EPS) beat and a modest sales rise, with gains in gross margin due to improved merchandise margins and return on dollars leverage.
TD Cowen maintained a Buy rating on Gap shares with a price target of $30.00, citing strong brand momentum and effective inventory management. The company revised its fiscal year 2024 sales guidance upward, indicating a potentially stronger fourth quarter in 2024 compared to Wall Street's forecasts.
Evercore ISI increased its price target for Gap to $33.00, maintaining an Outperform rating. The firm highlighted Gap's strong quarterly performance, with an adjusted EPS of $0.72, 24% higher than the projected $0.58, and a year-over-year net sales increase of 1.6%, exceeding the predicted 1.2% rise.
JPMorgan (NYSE:JPM) increased its financial outlook for Gap, raising the price target to $28 and keeping a Neutral rating. The company surpassed expectations with an EPS of $0.72, a 1.6% net sales increase, and a gross margin expansion of 140 basis points year-over-year.
Lastly, Gap Inc. amended the vesting terms for its performance-based restricted stock units for fiscal years 2024-2026, aligning more closely with the performance period and providing immediate vesting upon performance certification.
InvestingPro Insights
Gap's recent performance and CFRA's price target increase are complemented by several key insights from InvestingPro. The company's P/E ratio of 11.59 suggests that the stock is trading at a relatively modest valuation compared to its earnings, which aligns with the analyst's cautious optimism. This is further supported by an InvestingPro Tip indicating that Gap has been profitable over the last twelve months.
The company's financial health appears solid, with an InvestingPro Tip highlighting that liquid assets exceed short-term obligations. This financial stability is reinforced by Gap's dividend history, as another InvestingPro Tip notes that the company has maintained dividend payments for 49 consecutive years. Currently, Gap offers a dividend yield of 2.72%, which may be attractive to income-focused investors.
While CFRA mentions challenges in growth, Gap's revenue for the last twelve months stands at $15.17 billion, with a slight growth of 0.44%. The company's EBITDA growth of 68.16% over the same period is particularly noteworthy, suggesting improved operational efficiency.
For investors considering Gap, it's worth noting that InvestingPro offers 5 additional tips, providing a more comprehensive analysis of the company's financial health and market position.
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