By Wells Fargo & Co. analyst, Ike Boruchow, recently upgraded Gap Inc. to overweight from equal weight, citing a potential “turnaround story gaining traction.” The clothing retailer’s price target has also been raised to $16 from $11 a share. This positive news has prompted a 2.7% increase in Gap’s stock during premarket trading on Wednesday.
Positive Changes on the Horizon
According to Boruchow, the situation at Gap Inc. is becoming increasingly compelling. The company has successfully managed its inventory and implemented improved cost controls. Additionally, with new management in place, there is an expectation for the narrative to change and drive significant upside for the company.
Key Leadership Hires
One notable addition to Gap’s management team is Richard Dickson, the former president of Mattel Inc. This decision has been praised by Boruchow, who highlights Dickson’s success in revitalizing the heritage Barbie brand. A similar revival is much needed at Gap Inc. today.
Another crucial hiring decision is Chris Blakeslee, the former president of Alo Yoga, who has joined the company to turn around its underperforming Athleta brand.
Streamlining Operations
Gap Inc. has focused on optimizing its merchandise inventory by adjusting its wholesale purchases in favor of a more responsive supply chain. This move reflects the company’s commitment to right-sizing its operations. Additionally, Gap aims to reduce expenses and has set a target of $550 million in cost savings.
Strong Earnings Outlook
Boruchow’s earnings targets for Gap Inc. are promising. He predicts earnings of 80 cents per share for 2023 and $1.15 per share for 2024. These estimates exceed the FactSet consensus estimates of 58 cents per share in 2023 and 85 cents per share in 2024.
With improved profitability and Gap’s new leadership strategies to stabilize the company’s top line, Wells Fargo sees the potential for 2025 earnings per share to exceed $2. This projection represents a significant increase from the current consensus estimate of 94 cents for 2025.
Promising Performance
Prior to the recent gains, Gap Inc.’s stock had already risen by 10% in 2023. This growth is in line with the benchmark S&P 500’s 10.6% gain.
In conclusion, Gap Inc. is undergoing positive changes that are expected to drive its turnaround story. With a compelling setup, improved cost controls, and new management at the helm, the company has the potential for significant upward momentum. Coupled with strong earnings projections, Gap Inc. appears to be on track for a bright future.
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