On Friday, CFRA adjusted Gap, Inc.'s (NYSE:GPS) financial outlook, raising the price target from $12.00 to $15.00, while maintaining a Sell rating on the stock. The revision reflects a more optimistic earnings per share (EPS) estimate for the fiscal year ending in January 2025 (FY 25).
The firm increased its 12-month price target for Gap by $3, justifying the new target with a multiple of 12.5 times the updated FY 25 EPS estimate. This valuation is still below Gap's 10-year average forward price-to-earnings (P/E) multiple. The decision to raise the target is based on the company's performance, which continues to lag behind its peers in terms of operating margin and revenue growth.
CFRA has also updated its EPS estimate for FY 25, raising it by $0.20 to $1.20 and has initiated an EPS estimate of $1.25 for FY 26. Gap's fourth-quarter normalized earnings were reported at $0.49 per share, which was $0.24 higher than consensus estimates, on revenues of $4.30 billion. These figures surpassed expectations by $73 million.
The company's quarterly performance by brand showed mixed results. Old Navy saw a year-over-year revenue increase of 6%, while the Gap brand experienced a 5% decline, Banana Republic a 2% decrease, and Athleta a 4% drop. Despite these mixed brand performances, Gap's adjusted gross margin for the quarter expanded by 380 basis points year-over-year to 38.8%, attributed to lower freight costs and reduced promotional activity.
Despite the stock's significant appreciation—having doubled in value in less than six months—CFRA remains cautious about Gap's long-term investment potential. The firm cites the company's below-peer operating metrics, lack of clear growth drivers, and inconsistent management performance as reasons for skepticism.
CFRA suggests that there are more attractive options within the apparel sector for investors.
InvestingPro Insights
Following CFRA's recent update on Gap, Inc. (NYSE:GPS), InvestingPro data and tips provide additional context for investors considering the apparel retailer's stock. Gap's market capitalization stands at approximately $7.38 billion, with a price-to-earnings (P/E) ratio of 14.57, which is favorable when compared to the adjusted P/E ratio for the last twelve months as of Q3 2024, which indicates a much higher valuation at 105.15.
One of the key InvestingPro Tips highlights Gap's high shareholder yield, which is a positive sign for investors looking for returns through dividends and buybacks. Moreover, Gap has maintained dividend payments for an impressive 49 consecutive years and has raised its dividend for 3 consecutive years, pointing to a stable and potentially growing income stream for shareholders. This is particularly noteworthy as the company currently offers a dividend yield of 3.1% as of early 2024.
Another notable InvestingPro Tip is that analysts predict the company will be profitable this year, which aligns with the recent uptick in Gap's stock price over the last six months, showing a significant increase of 75.2%. This suggests that despite the stock's volatility, as indicated by its large price movements, there could be investor confidence in the company's ability to generate profits.
Investors can explore these and other insights in more detail with additional InvestingPro Tips available on the platform. Gap's financial metrics and analyst predictions, including a total of 10 tips for Gap, can be found at https://www.investing.com/pro/GPS. For those interested in a deeper analysis, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, offering a comprehensive investment tool to navigate market fluctuations with confidence.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.