Gap logged a surprise profit in its fiscal second quarter.
Gabby Jones/Bloomberg
Gap , like other retailers, has had a tough year, but investors know the risks. That means the time has come to look to the chain’s future, a Barclays analyst said as she flipped her rating on the stock.
Analyst Adrienne Yih raised her call on Gap stock (ticker: GPS) to the equivalent of Hold from the equivalent of Sell in a research note published Tuesday. She raised her target for the stock price by 50%, to $9.
Shares of Gap rose as much as 6% after the market opened, though the gain later faded to 1%, leaving the price at $9.58 in afternoon trading. The stock is down 46% this year, while the SPDR S & P Retail exchange-traded fund (XRT) has lost nearly 30%. The S&P 500 has fallen by 17%.
Yih doesn’t see immediate fixes to several issues affecting the company. On the list are excess inventory, pressure on the Athleta athleisure brand as consumers dress up more often, its search for a new CEO, and an uncertain turnaround for its brand Old Navy after the company overestimated demand for plus-size apparel.
Gap didn’t immediately respond to a request for comment, but it has acknowledged some of these pressures. In its latest earnings call, executives said Gap is scaling back extended-size inventory at Old Navy stores and is focusing on striking the right balance between active and lifestyle apparel at Athleta.
The silver lining for investors, Yih wrote, is that these major risks are known and reflected in the stock price.
In addition, Gap is taking significant measures to stabilize and improve the business, while it also possesses skills that could make money over the long term, Yih said. She highlighted Gap’s Global Sourcing arm as an asset that it could use to provide logistics services to other retailers.
Gap is one of the largest importers of apparel, so it has long-term sourcing relationships, Yih said. Bricks-and-mortar retailers could use these partnerships, as well as capacity at Gap’s distribution centers, to reduce costs, she said.
Yih’s note comes a few days after Gap reported an unexpected profit for its fiscal second quarter but also withdrew its financial forecasts for the full year due to the uncertain economic outlook and its search for a new CEO.
Gap is far from the only retailer facing difficulties. Macy’s (M) recently lowered its outlook for the remainder of the year to incorporate the risk it sees in the continued deterioration of consumer discretionary spending.
Among apparel retailers, Barron’s sees American Eagle ( AEO
) as the best poised for growth in the long term given its fast-growing subbrand Aerie and recent acquisitions of AirTerra and Quiet Logistic, which ship merchandise for American Eagle as well as other brands.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com
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