In its new report, Morgan Stanley & Co upgraded Gap Inc. to ‘equal-weight’ from ‘underweight’ and said i that the retailer’s stock decline implies the market appreciates its concerns of broader turnaround uncertainty against recent mis-execution and potentially overly optimistic 2022 EPS guidance. The Morgan Stanley report also says, Gap is in need of significant transformation.
The report says, the analyst is less confident of Gap’s ability to execute following [third quarter 2021’s] mis-execution. Its gross margin gains are likely to reverse, and it is unclear if higher marketing spend will yield sales reacceleration. The company’s multiyear program of closing Gap and Banana Republic stores in North America — 350 in total by January 2024 — was at the end of the fourth quarter 70 percent complete.
Gap Inc. also operates Old Navy, where the performance has recently slowed, and Athleta, which continues to be the star performer in the portfolio and on track to reach $2 billion in volume in 2023. There have been reports that shareholder activists are pressuring the Gap board to spin off Athleta to raise shareholder value. Some analysts believe Gap brands, if separated out, would yield more value to shareholders than Gap Inc. as it stands now.
