On Friday, CFRA increased the price target on shares of Gap, Inc. (NYSE:GPS) to $20, up from the previous $15, while maintaining a Sell rating on the stock. The new price target is derived from a multiple of 12.5 times the firm's fiscal year 2025 (ending January) earnings per share (EPS) estimate. This valuation is below Gap's one-year average forward price-to-earnings (P/E) multiple of 15.0 times, which reflects the company's lower operating margin and revenue growth compared to its peers.
CFRA also adjusted their fiscal year 2025 EPS estimate for Gap upwards by $0.40 to $1.60, while keeping the fiscal year 2026 estimate unchanged at $1.25. The revision follows Gap's first-quarter normalized EPS of $0.42, which exceeded the consensus estimate by $0.25 and represented a significant increase from the $0.01 reported in the same quarter the previous year. The company's revenues for the quarter were $3.39 billion, surpassing expectations by $101 million.
Gap's performance in the first quarter showed a mixed picture across its brands. Old Navy experienced a 5% year-over-year revenue increase, while Gap brand sales remained unchanged. Banana Republic and Athleta each reported a modest 2% increase in sales. Additionally, the company's adjusted gross margin for the quarter expanded by 410 basis points year-over-year to 41.2%, benefiting from lower commodity costs.
In light of the first-quarter results, Gap has revised its operating income guidance, anticipating a mid-40% increase from the previous year's figure of $606 million. Despite these developments, CFRA's analysis suggests that Gap's stock remains overvalized when compared to its competitors. The firm cites the company's consistent underperformance and its trading above 15 times the next twelve months' (NTM) EPS estimates as reasons for their continued Sell recommendation, indicating that there are more attractive investment opportunities within the apparel sector.
In other recent news, Gap Inc. has experienced a series of positive developments. The company reported a significant margin and earnings beat, returning to pre-pandemic levels, which prompted Baird to raise the price target for Gap shares to $28. BMO Capital, Telsey Advisory Group, and BofA Securities also increased their price targets for Gap, in response to the company's strong quarterly results and revenue growth, particularly in its Banana Republic and Athleta brands.
JPMorgan highlighted the stability of sales from Old Navy and Gap, which comprise approximately 80% of the company's revenue, and potential growth opportunities for Athleta. Despite these positive developments, analysts from various firms maintained a cautious stance due to the uncertain macroeconomic environment and the ongoing efforts to rejuvenate the brand portfolio.
These recent developments follow the company's upward revision of full-year guidance and its first-quarter adjusted earnings per share announcement of $0.41, which surpassed both BofA Securities' estimate of $0.12 and the consensus estimate of $0.13. The company's management, however, has advised patience with the ongoing turnarounds of the Athleta and Banana Republic brands. The new price targets reflect a cautious yet optimistic outlook on the company's ability to reach its financial goals in the coming years.
InvestingPro Insights
Following CFRA's recent price target update for Gap, Inc. (NYSE:GPS), current metrics from InvestingPro show a nuanced financial picture that investors may find valuable. With a market capitalization of $8.41 billion and a P/E ratio standing at 16.43, Gap presents a moderately valued opportunity relative to earnings. Notably, the company's P/E ratio has adjusted slightly downwards to 15.54 when looking at the last twelve months as of Q4 2024, suggesting a slight undervaluation compared to the industry average.
InvestingPro Tips highlight that Gap has demonstrated a commitment to shareholder returns, raising its dividend for three consecutive years and maintaining dividend payments for an impressive 49 years. Moreover, analysts have shown a positive outlook by revising their earnings upwards for the upcoming period. These factors may signal confidence in the company's financial health and its potential for steady income generation for investors.
InvestingPro Data also reveals a robust gross profit margin of 47.32% for the last twelve months as of Q4 2024, which underscores Gap's efficiency in managing its cost of goods sold relative to sales. Additionally, the company has enjoyed a high return over the last year, with a 1 Year Price Total Return of 193.6%. This performance is particularly notable in the context of Gap's recent revenue growth of 1.3% in Q4 2024, indicating that the stock's appreciation may be driven by factors beyond just top-line growth.
For readers interested in a deeper dive into Gap's financials and for more InvestingPro Tips, visit Investing.com. And remember, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 8 additional InvestingPro Tips available for Gap, which can offer further insights into making an informed investment decision.
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