Wells Fargo & Co. analyst Ike Boruchow upgraded Gap Inc. on Wednesday to overweight from equal weight and hiked the clothing retailer’s price target to $16 from $11 a share with a potential “turnaround story gaining traction.”
The Gap’s stock
GPS,
was up 2.7% in premarket trading on Wednesday.
“The setup at GPS has become compelling — with right-sized inventory, improved cost controls and new management set to inflect the narrative and drive material upside to Street,” Boruchow said in a research note.
In August, the Gap tapped former Mattel Inc.
MAT,
president Richard Dickson, in a move that drew praise from Wells Fargo’s Boruchow.
“Dickson is credited with revitalizing the heritage Barbie brand — a revival akin to what is needed at GPS today,” Boruchow said.
Another key hire for the Gap is Chris Blakeslee, former president of Alo Yoga, in a move to turn around its underperforming Athleta brand, he said.
Other Gap brands include Old Navy and Banana Republic.
Gap has managed to right-size its merchandise inventory with plans to moderating its wholesale purchases in favor of more responsive supply-chain levers, Boruchow said.
The company still has an opportunity to reduce expenses and has targeted $550 million in cost savings thus far, he said.
Boruchow’s earnings targets for Gap of 80 cents a share for 2023 and $1.15 a share for 2024 are well ahead of the FactSet consensus estimates of 58 cents a share in 2023 and 85 cents a share in 2024.
When improved profitability is combined with the potential to stabilize the top line via Gap’s new leadership strategies, Wells Fargo sees potential 2025 earnings per share being powered all the way to $2-plus, he said. That represents more than a doubling of the current consensus EPS estimate of 94 cents for 2025.
Prior to Wednesday’s trades, Gap’s stock has risen 10% in 2023, roughly matching the 10.6% gain of the benchmark S&P 500
SPX.
This story originally appeared on Marketwatch
