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On Wednesday, Wells Fargo (NYSE:WFC) analyst Ike Boruchow adjusted Gap Inc. (NYSE:GAP)’s stock rating, shifting from Overweight to Equal Weight and revising the price target downwards to $24 from the previous $30. Boruchow expressed concerns over the retail giant’s future, suggesting that the opportunities for further margin improvement and cost leverage may be limited in the current environment. The stock, currently trading at $21.76 with a market capitalization of $8.16 billion, has shown resilience with a 9.18% gain over the past week. InvestingPro data reveals the company maintains a strong financial health score of 3.18 (GREAT).
Gap has experienced a notable increase in operating margin by 300 basis points over the past two years, a testament to the management’s efforts in cost control, inventory balance, and reduced promotions. The company currently maintains a robust gross profit margin of 41.28%. The CEO of Gap, Sonia Syngal, has been praised for the company’s turnaround during this period. However, the Wells Fargo analyst indicated that sustaining this level of performance could be challenging going forward. InvestingPro subscribers can access 8 additional key insights about Gap’s financial performance and future prospects.
The revised price target of $24 is based on approximately 15 times the forecasted earnings per share (EPS) for fiscal year 2027. Boruchow has also provided a downside scenario where the stock could drop to $15, which corresponds to about 10 times the EPS on a lowered forecast of $1.50 for fiscal year 2026. Conversely, an upside scenario is presented with a potential price of $26, approximately 13 times the EPS if it reaches a higher-than-current estimate of $2.00 for fiscal year 2026. According to InvestingPro’s Fair Value analysis, Gap currently appears undervalued, trading at an attractive P/E ratio of 9.79 relative to its near-term earnings growth potential.
Boruchow’s analysis points to the margin structure and the macro-sensitive nature of Gap’s Old Navy brand as potential risks for the company. The analyst’s outlook reflects caution regarding the retailer’s ability to maintain its recent financial improvements amidst a challenging retail environment.
Gap Inc. shareholders and potential investors now have updated insights from Wells Fargo to consider as they evaluate the company’s stock performance and future prospects in the retail sector.
In other recent news, Gap Inc. reported fourth-quarter earnings with a normalized EPS of $0.54, surpassing consensus estimates by $0.17, and revenues of $4.15 billion, which exceeded expectations by $79 million. The company’s Q4 gross margin improved significantly, expanding by 250 basis points year-over-year to 41.3%, driven by reduced commodity and rent costs. Looking forward, Gap has provided guidance for revenue growth of 1% to 2% and an operating margin forecast between 8% and 10%. Additionally, CFRA upgraded Gap’s stock rating from Buy to Strong Buy, raising the 12-month price target to $30.00 based on its fiscal year 2026 EPS estimate. Evercore ISI maintained an Outperform rating with a $30 price target, noting Gap’s successful marketing campaigns and high-profile celebrity partnerships as factors driving market share gains. Meanwhile, BMO Capital Markets affirmed its Market Perform rating with a $25 price target, highlighting Gap’s solid earnings beat and projected EBIT growth for FY25. In another development, Old Navy, a Gap brand, is enhancing its inventory tracking through a partnership with RADAR, implementing AI-powered RFID technology across its stores. Lastly, Gap updated its incentive plans for employees and directors, aligning interests with long-term company performance and shareholder value.
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